Chapter 18

“How Well Am I Doing?” Financial Statement Analysis

True/False

1. In determining whether a company's financial condition is

F improving or deteriorating over time, vertical analysis of
Medium financial statement data would be more useful than horizontal
analysis.

2. Trend percentages state several years' financial data in terms

T of a base year. For example, sales for every year would be
Easy stated as a percentage of the sales in the base year.

3. The gross margin percentage is computed taking the difference

T between sales and cost of goods and then dividing the result by
Easy sales.

4. The gross margin percentage is computed by dividing net income

F before interest and taxes by sales.
Medium

5. The price-earnings ratio is determined by dividing the price of

F a product by its profit margin.
Easy

6. The price-earnings ratio is computed by dividing the market

T price per share by the current earnings per share.
Easy

7. When computing the return on total assets, the after-tax effect

F of interest expense must be subtracted from net income.
Medium

8. If the assets in which funds are invested have a rate of return

F lower than the fixed rate of return paid to the supplier of the
Medium funds, then financial leverage is positive.

9. If the market value of a share of stock is greater than its

F book value, the stock is probably overpriced.
Easy

10. Working capital equals current assets, plus noncurrent

T liabilities and stockholders' equity, less total assets.
Hard

664Managerial Accounting, 9/e

11. Assuming that a company has a current ratio greater than 1.0 to
T 1, repaying a short-term note payable will increase the current
Medium ratio.

12. The acid-test ratio is a test of the quality of accounts

F receivable--in other words, whether they are likely to be
Medium collected.

13. When computing the acid-test ratio, prepaid expenses are

T ignored.
Medium

14. Only credit sales (i.e., sales on account) are included in the
T computation of the accounts receivable turnover.
Easy

15. The inventory turnover ratio is equal to the average inventory

F balance divided by the cost of goods sold.
Easy

Multiple Choice

16. Horizontal analysis of financial statements is accomplished

D through:
Easy a. placing statement items on an after-tax basis.
b. common-size statements.
c. computing both earnings per share and the price-earnings
ratio.
d. trend percentages.

17. The gross margin percentage is most likely to be used to

D assess:
Easy a. how quickly accounts receivables can be collected.
b. how quickly inventories are sold.
c. the efficiency of administrative departments.
d. the overall profitability of the company's products.

18. Earnings per share of common stock will immediately increase as

C a result of:
Medium a. the sale of additional shares of common stock by the
company.
b. an increase in the dividends paid to common stockholders by
the company.
c. an increase in the company's net income.
d. the issuance of bonds by the company to finance construction
of new buildings.

Managerial Accounting, 9/e 665

19. The market price of XYZ Company's common stock dropped from $25
C to $21 per share. The dividend paid per share remained
Easy unchanged. The company’s dividend payout ratio would:
a. increase.
b. decrease.
c. be unchanged.
d. impossible to determine without more information.

20. An increase in the market price of a company’s common stock

A will immediately affect its:
Medium a. dividend yield ratio.
CMA b. debt-to-equity ratio.
adapted c. earnings per share of common stock.
d. dividend payout ratio.

21. Which of the following is true regarding the calculation of

D return on total assets?
Medium a. The numerator of the ratio consists only of net income.
b. The denominator of the ratio consists of the balance of
total assets at the end of the period under consideration.
c. The numerator of the ratio consists of net income plus
interest expense times the tax rate.
d. The numerator of the ratio consists of net income plus
interest expense times one minus the tax rate.

22. Financial leverage is negative when:

D a. the return on total assets is less than the rate of return
Medium on common stockholders' equity.
b. total liabilities are less than stockholders' equity.
c. total liabilities are less than total assets.
d. the return on total assets is less than the rate of return
demanded by creditors.

23. Which of the following is not a source of financial leverage?

D a. Bonds payable.
Medium b. Accounts payable.
c. Preferred stock.
d. Retained earnings.

24. If a company's bonds bear an interest rate of 8%, the tax rate
A is 30%, and the company's assets are generating an after-tax
Medium return of 7%, then the leverage would be:
a. positive.
b. negative.
c. neither positive or negative.
d. impossible to determine without knowing the return on common
stockholders' equity.

666Managerial Accounting, 9/e

25. A company’s current ratio and acid-test ratios are both greater
D than 1.0 to 1. If obsolete inventory is written off, this
Medium would:
CMA a. decrease the acid-test ratio.
adapted b. increase the acid-test ratio.
c. increase net working capital.
d. decrease the current ratio.

26. If a company converts a short-term note payable into a long-

D term note payable, this transaction would:
Medium a. decrease working capital and increase the current ratio.
b. decrease working capital and decrease the current ratio.
c. decrease the current ratio and decrease the acid-test ratio.
d. increase working capital and increase the current ratio.

27. Which one of the following would increase the working capital
B of a company?
Hard a. Cash payment of payroll taxes payable.
CMA b. Refinancing a short-term note payable with a two year note
adapted payable.
c. Cash collection of accounts receivable.
d. Payment of a 20-year mortgage payable with cash.

28. Sale of a piece of equipment at book value for cash will:

A a. increase working capital.
Medium b. decrease working capital.
c. decrease the debt-to-equity ratio.
d. increase net income.

29. If a firm has a high current ratio but a low acid-test ratio,
B one can conclude that:
Medium a. the firm has a large outstanding accounts receivable
CMA balance.
adapted b. the firm has a large investment in inventory.
c. the firm has a large amount of current liabilities.
d. the firm's financial leverage is very high.

30 Desktop Co. presently has a current ratio of 1.2 to 1 and an

B acid-test ratio of 0.8 to 1. Prepaying next year's office rent
Hard of $50,000 will:
a. have no effect on either the company's current ratio or its
acid-test ratio.
b. have no effect on the company's current ratio but will
decrease its acid-test ratio.
c. decrease the company's current ratio and decrease its acid-
test ratio.
d. increase the company's current ratio and increase its acid-
test ratio.

Managerial Accounting, 9/e 667

31. The Miller Company paid off some of its accounts payable using
A cash. The company's current ratio is greater than 1.0 to 1. The
Medium company’s current ratio would:
a. increase.
b. decrease.
c. remain unchanged.
d. impossible to determine from the information given.

32. Rahner Company has a current ratio of 1.75 to 1. This ratio

A will decrease if Rahner Company:
Hard a. borrows cash using a six-month note.
b. pays the taxes payable which have been a current liability.
c. pays the following month's rent on the last day of the year.
d. sells inventory for more than their cost.

33. Which of the following accounts would be included in the

D calculation of the acid-test ratio:
Easy
Accounts Receivable Prepaid Expense Inventory
a. yes yes no
b. no yes yes
c. no no yes
d. yes no no

34. Allen Company's average collection period for accounts

C receivable was 40 days last year, but increased to 60 days this
Medium year. Which of the following would most likely account for this
change?
a. a decrease in accounts receivable relative to sales.
b. a decrease in sales.
c. a relaxation of credit policies.
d. an increase in sales.

35. The net accounts receivable for Andante Company were $150,000
B at the beginning of the most recent year and $190,000 at the
Hard end of the year. If the accounts receivable turnover for the
year was 8.5, and 15% of total sales were cash sales, then the
total sales for the year were:
a. $1,445,000.
b. $1,700,000.
c. $1,900,000.
d. $1,500,000.

668Managerial Accounting, 9/e

36. Selected data from Sheridan Corporation’s year-end financial
A statements are presented below. The difference between average
Hard and ending inventory is immaterial.
CMA
adapted Current ratio ............ 2.0
Acid-test ratio .......... 1.5
Current liabilities ...... $120,000
Inventory turnover ....... 8 times
Gross profit margin ...... 40%

Sheridan's sales for the year was:

a. $800,000.
b. $480,000.
c. $1,200,000.
d. $240,000.

37. Fulton Company's price-earnings ratio is 8.0 and the market

C price of a share of common stock is $32. The company has 3,000
Hard shares of preferred stock outstanding with each share receiving
a dividend of $3 per share. The earnings per share of common
stock is:
a. $10.
b. $7.
c. $4.
d. $3.

38. Perlman Company had 100,000 shares of common stock and 20,000
C shares of preferred stock at the end of the year just
Hard completed. Preferred stockholders received dividends totaling
$140,000. Common stockholders received dividends totaling
$210,000. If the dividend payout ratio for the year was 70%,
then the net income for the year was:
a. $300,000.
b. $287,000.
c. $440,000.
d. $147,000.

39. NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different
C versions of the same question.
Medium
Arlberg Company's net income last year was $250,000. The
company has 150,000 shares of common stock and 80,000 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 $1.30 per
share on the common stock and $1.40 per share on the preferred
stock. The earnings per share of common stock is closest to:
a. $1.67.
b. $2.41.
c. $0.92.
d. $0.37.

Managerial Accounting, 9/e 669

40. NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different
C versions of the same question.
Medium
Arget Company's net income last year was $600,000. The company
has 150,000 shares of common stock and 60,000 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 $1.10 per
share on the common stock and $0.60 per share on the preferred
stock. The earnings per share of common stock is closest to:
a. $4.24.
b. $4.00.
c. $3.76.
d. $2.90.

41. NOTE TO THE INSTRUCTOR: Questions 39, 40, and 41 are different
D versions of the same question.
Medium
Arquandt Company's net income last year was $550,000. The
company has 150,000 shares of common stock and 50,000 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 $1.20 per
share on the common stock and $1.70 per share on the preferred
stock. The earnings per share of common stock is closest to:
a. $3.67.
b. $2.47.
c. $4.23.
d. $3.10.

42. NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different

C versions of the same question.
Easy
The following data have been taken from your company's
financial records for the current year:

Earnings per share ...... $10

Dividend per share ...... $6
Market price per share .. $90
Book value per share .... $70

The price-earnings ratio is:

a. 1.67 to 1.
b. 15.0 to 1.
c. 9.0 to 1.
d. 7.0 to 1.

670Managerial Accounting, 9/e

43. NOTE TO THE INSTRUCTOR: Questions 42 and 43 are different
C versions of the same question.
Easy
The following data have been taken from your company's
financial records for the current year:

Earnings per share ...... $15

Dividend per share ...... $9
Market price per share .. $120
Book value per share .... $90

The price-earnings ratio is:

a. 12.5 to 1.
b. 6.0 to 1.
c. 8.0 to 1.
d. 7.5 to 1.

44. Information concerning the common stock of Morris Company as of

D the end of the company's fiscal year is presented below.
Medium
Number of shares outstanding ...... 460,000
Par value per share ............... $5.00
Dividends paid per share .......... $6.00
Market price per share ............ $54.00
Earnings per share ................ $18.00

The dividend yield ratio is closest to:

a. 50.0%.
b. 33.3%.
c. 120.0%.
d. 11.1%.

45. Cameron Company had 50,000 shares of common stock issued and
D outstanding during the year just ended. The following
Hard information pertains to these shares:

Price originally issued ................... $40

Book value at end of current year ......... $70
Market value, beginning of current year ... $85
Market value, end of current year ......... $90

The total dividend on common stock for the year was $400,000.
Cameron Company's dividend yield ratio for the year was:
a. 20.00%
b. 11.43%.
c. 9.41%.
d. 8.89%.

Managerial Accounting, 9/e 671

46. NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different
C versions of the same question.
Medium
Braverman Company's net income last year was $75,000 and its
interest expense was $10,000. Total assets at the beginning of
the year were $650,000 and total assets at the end of the year
were $610,000. The company's income tax rate was 30%. The
company's return on total assets for the year was closest to:
a. 13.5%.
b. 12.4%.
c. 13.0%.
d. 11.9%.

47. NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different
D versions of the same question.
Medium
Brachlan Company's net income last year was $80,000 and its
interest expense was $20,000. Total assets at the beginning of
the year were $660,000 and total assets at the end of the year
were $620,000. The company's income tax rate was 30%. The
company's return on total assets for the year was closest to:
a. 12.5%.
b. 13.4%.
c. 15.6%.
d. 14.7%.

48. NOTE TO THE INSTRUCTOR: Questions 46, 47, and 48 are different
A versions of the same question.
Medium
Brawer Company's net income last year was $55,000 and its
interest expense was $20,000. Total assets at the beginning of
the year were $660,000 and total assets at the end of the year
were $620,000. The company's income tax rate was 30%. The
company's return on total assets for the year was closest to:
a. 10.8%.
b. 8.6%.
c. 11.7%.
d. 9.5%.

49. The total assets of the Philbin Company on January 1, 19x9 were
C $2.3 million and on December 31, 19x9 were $2.5 million. Net
Medium income for 19x9 was $188,000. Dividends for 19x9 totaled
$75,000, interest expenses totaled $70,000, and the tax rate
was 30%. The return on total assets for 19x9 was closest to:
a. 9.5%.
b. 6.8%.
c. 9.9%.
d. 10.8%.

672Managerial Accounting, 9/e

50. Selected financial data for Irvington Company appear below:
C
Medium Account Balances o
CPA Beginning End of
adapted of year year
Preferred stock ......... $125,000 $125,000
Common stock ............. 300,000 400,000
Retained earnings......... 75,000 185,000

During the year, the company paid dividends of $10,000 on its

preferred stock. The company's net income for the year was
$120,000. The company's return on common stockholders' equity
for the year is closest to:
a. 17%.
b. 19%.
c. 23%.
d. 25%.

51. NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different
A versions of the same question.
Easy
Crasler Company's net income last year was $100,000. The
company paid preferred dividends of $20,000 and its average
common stockholders' equity was $580,000. The company's return
on common stockholders' equity for the year was closest to:
a. 13.8%.
b. 3.4%.
c. 20.7%.
d. 17.2%.

52. NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different
D versions of the same question.
Easy
Crawler Company's net income last year was $80,000. The company
paid preferred dividends of $10,000 and its average common
stockholders' equity was $400,000. The company's return on
common stockholders' equity for the year was closest to:
a. 20.0%.
b. 22.5%.
c. 2.5%.
d. 17.5%.

Managerial Accounting, 9/e 673

53. NOTE TO THE INSTRUCTOR: Questions 51, 52, and 53 are different
C versions of the same question.
Easy
Crabtree Company's net income last year was $50,000. The
company paid preferred dividends of $20,000 and its average
common stockholders' equity was $440,000. The company's return
on common stockholders' equity for the year was closest to:
a. 15.9%.
b. 11.4%.
c. 6.8%.
d. 4.5%.

54. The following account balances have been provided for the end
A of the most recent year:
Medium
Total assets $150,000
Total stockholders' equity $120,000
Total common stock $50,000 (5,000 shares)
Total preferred stock $10,000 (1,000 shares)

The book value per share of common stock is:

a. $22.
b. $25.
c. $20.
d. $28.

55. NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different
A versions of the same question.
Medium
Dratif Company's working capital is $33,000 and its current
liabilities are $80,000. The company's current ratio is closest
to:
a. 1.41 to 1.
b. 0.59 to 1.
c. 3.42 to 1.
d. 0.41 to 1.

56. NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different
D versions of the same question.
Medium
Dragin Company's working capital is $36,000 and its current
liabilities are $61,000. The company's current ratio is closest
to:
a. 2.69 to 1.
b. 0.41 to 1.
c. 0.59 to 1.
d. 1.59 to 1.

674Managerial Accounting, 9/e

57. NOTE TO THE INSTRUCTOR: Questions 55, 56, and 57 are different
B versions of the same question.
Medium
Draban Company's working capital is $38,000 and its current
liabilities are $59,000. The company's current ratio is closest
to:
a. 0.36 to 1.
b. 1.64 to 1.
c. 0.64 to 1.
d. 2.55 to 1.

58. At the end of the year just completed, Orem Company's current
C liabilities totaled $75,000, and its long-term liabilities
Hard totaled $225,000. Working capital at year-end was $100,000. If
the company's debt-to-equity ratio is 0.30 to 1, total long-
term assets must equal:
a. $1,000,000.
b. $1,300,000.
c. $1,125,000.
d. $1,225,000.

59. Starrs Company has current assets of $300,000 and current

B liabilities of $200,000. Which of the following transactions
Hard would increase its working capital?
CMA a. Prepayment of $50,000 of next year’s rent.
adapted b. Refinancing $50,000 of short-term debt with long-term debt.
c. Acquisition of land valued at $50,000 by issuing new common
stock.
d. Purchase of $50,000 of marketable securities for cash.

60. Selected year-end data for the Brayer Company are presented
C below:
Hard
CMA Current liabilities ........ $600,000
adapted Acid-test ratio ............ 2.5 to 1
Current ratio .............. 3.0 to 1
Cost of goods sold ......... $500,000

The company has no prepaid expenses and inventories remained

unchanged during the year. Based on these data, the company's
inventory turnover ratio for the year was closest to:
a. 1.20 times.
b. 2.40 times.
c. 1.67 times.
d. 2.33 times.

Managerial Accounting, 9/e 675

61. Harwichport Company has a current ratio of 3.5 to 1 and an
A acid-test ratio of 2.8 to 1. Current assets equal $175,000 of
Hard which $5,000 consists of prepaid expenses. Harwichport
Company's inventory must be:
a. $30,000.
b. $40,000.
c. $50,000.
d. $35,000.

62. Ben Company has the following data for the year just ended:
A
Hard Cash .................... ?
Accounts Receivable ..... $28,000
Inventory ............... $35,000
Current ratio ........... 2.4 to 1
Acid test ratio ......... 1.6 to 1

Ben Company's current liabilities were:

a. $43,750.
b. $50,400.
c. $35,000.
d. $63,000.

63. Marcy Corporation's current ratio is currently 1.75 to 1. The

C firm’s current ratio cannot fall below 1.5 to 1 without
Hard violating agreements with its bondholders. If current
CMA liabilities are presently $250 million, the maximum new short-
adapted term debt that can be issued to finance an equivalent amount of
inventory expansion is:
a. $ 41.67 million.
b. $375.00 million.
c. $125.00 million.
d. $ 62.50 million.

64. NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different
B versions of the same question.
Easy
Eral Company has $17,000 in cash, $3,000 in marketable
securities, $36,000 in current receivables, $24,000 in
inventories, and $45,000 in current liabilities. The company's
acid-test (quick) ratio is closest to:
a. 1.78 to 1.
b. 1.24 to 1.
c. 0.80 to 1.
d. 0.44 to 1.

676Managerial Accounting, 9/e

65. NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different
C versions of the same question.
Easy
Erambo Company has $11,000 in cash, $6,000 in marketable
securities, $27,000 in current receivables, $8,000 in
inventories, and $51,000 in current liabilities. The company's
acid-test (quick) ratio is closest to:
a. 0.75 to 1.
b. 1.02 to 1.
c. 0.86 to 1.
d. 0.53 to 1.

66. NOTE TO THE INSTRUCTOR: Questions 64, 65, and 66 are different
A versions of the same question.
Easy
Erack Company has $15,000 in cash, $4,000 in marketable
securities, $38,000 in current receivables, $18,000 in
inventories, and $40,000 in current liabilities. The company's
acid-test (quick) ratio is closest to:
a. 1.43 to 1.
b. 0.95 to 1.
c. 1.33 to 1.
d. 1.88 to 1.

67. Eastham Company's accounts receivable were $600,000 at the

D beginning of the year and $800,000 at the end of the year. Cash
Hard sales for the year were $300,000. The accounts receivable
CPA turnover for the year was 5 times. Eastham Company's total
adapted sales for the year were:
a. $ 800,000.
b. $1,300,000.
c. $3,300,000.
d. $3,800,000.

68. NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different
C versions of the same question.
Easy
Frantic Company had $130,000 in sales on account last year. The
beginning accounts receivable balance was $10,000 and the
ending accounts receivable balance was $16,000. The company's
accounts receivable turnover was closest to:
a. 5.00 times.
b. 13.00 times.
c. 10.00 times.
d. 8.13 times.

Managerial Accounting, 9/e 677

69. NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different
D versions of the same question.
Easy
Fracus Company had $100,000 in sales on account last year. The
beginning accounts receivable balance was $14,000 and the
ending accounts receivable balance was $16,000. The company's
accounts receivable turnover was closest to:
a. 6.25 times.
b. 7.14 times.
c. 3.33 times.
d. 6.67 times.

70. NOTE TO THE INSTRUCTOR: Questions 68, 69, and 70 are different
B versions of the same question.
Easy
Frabine Company had $150,000 in sales on account last year. The
beginning accounts receivable balance was $14,000 and the
ending accounts receivable balance was $18,000. The company's
accounts receivable turnover was closest to:
a. 4.69 times.
b. 9.38 times.
c. 8.33 times.
d. 10.71 times.

71. NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different
B versions of the same question.
Easy
Granger Company had $180,000 in sales on account last year. The
beginning accounts receivable balance was $10,000 and the
ending accounts receivable balance was $18,000. The company's
average collection period (age of receivables) was closest to:
a. 20.28 days.
b. 28.39 days.
c. 36.50 days.
d. 56.78 days.

72. NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different
A versions of the same question.
Easy
Grapp Company had $130,000 in sales on account last year. The
beginning accounts receivable balance was $18,000 and the
ending accounts receivable balance was $16,000. The company's
average collection period (age of receivables) was closest to:
a. 47.73 days.
b. 50.54 days.
c. 44.92 days.
d. 95.46 days.

678Managerial Accounting, 9/e

73. NOTE TO THE INSTRUCTOR: Questions 71, 72, and 73 are different
D versions of the same question.
Easy
Grave Company had $150,000 in sales on account last year. The
beginning accounts receivable balance was $14,000 and the
ending accounts receivable balance was $10,000. The company's
average collection period (age of receivables) was closest to:
a. 24.33 days.
b. 58.40 days.
c. 34.07 days.
d. 29.20 days.

74. NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different
B versions of the same question.
Easy
Harris Company, a retailer, had cost of goods sold of $290,000
last year. The beginning inventory balance was $26,000 and the
ending inventory balance was $24,000. The company's inventory
turnover was closest to:
a. 12.08 times.
b. 11.60 times.
c. 5.80 times.
d. 11.15 times.

75. NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different
D versions of the same question.
Easy
Harton Company, a retailer, had cost of goods sold of $250,000
last year. The beginning inventory balance was $20,000 and the
ending inventory balance was $22,000. The company's inventory
turnover was closest to:
a. 5.95 times.
b. 11.36 times.
c. 12.50 times.
d. 11.90 times.

76. NOTE TO THE INSTRUCTOR: Questions 74, 75, and 76 are different
C versions of the same question.
Easy
Harker Company, a retailer, had cost of goods sold of $160,000
last year. The beginning inventory balance was $26,000 and the
ending inventory balance was $20,000. The company's inventory
turnover was closest to:
a. 6.15 times.
b. 8.00 times.
c. 6.96 times.
d. 3.48 times.

Managerial Accounting, 9/e 679

77. NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different
A versions of the same question.
Easy
Irawaddy Company, a retailer, had cost of goods sold of
$230,000 last year. The beginning inventory balance was $24,000
and the ending inventory balance was $22,000. The company's
average sale period (turnover in days) was closest to:
a. 36.50 days.
b. 73.00 days.
c. 38.09 days.
d. 34.91 days.

78. NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different
D versions of the same question.
Easy
Irappa Company, a retailer, had cost of goods sold of $170,000
last year. The beginning inventory balance was $28,000 and the
ending inventory balance was $26,000. The company's average
sale period (turnover in days) was closest to:
a. 55.82 days.
b. 60.12 days.
c. 115.94 days.
d. 57.97 days.

79. NOTE TO THE INSTRUCTOR: Questions 77, 78, and 79 are different
A versions of the same question.
Easy
Irally Company, a retailer, had cost of goods sold of $150,000
last year. The beginning inventory balance was $26,000 and the
ending inventory balance was $24,000. The company's average
sale period (turnover in days) was closest to:
a. 60.83 days.
b. 63.27 days.
c. 58.40 days.
d. 121.67 days.

80. Last year Dunn Company purchased $1,920,000 of inventory. The

C cost of good sold was $1,800,000 and the ending inventory was
Hard $360,000. What was the inventory turnover?
CPA a. 5.0 times.
adapted b. 5.3 times.
c. 6.0 times.
d. 6.4 times.

81. During the year just ended, James Company purchased $425,000 of
A inventory. The inventory balance at the beginning of the year
Hard was $175,000. If the cost of goods sold for the year was
$450,000, then the inventory turnover for the year was:
a. 2.77 times.
b. 2.57 times.
c. 3.00 times.
d. 2.62 times.

680Managerial Accounting, 9/e

82. NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different
D versions of the same question.
Easy
Last year Javer Company had a net income of $200,000, income
tax expense of $74,000, and interest expense of $20,000. The
company's times interest earned was closest to:
a. 10.00 times.
b. 11.00 times.
c. 5.30 times.
d. 14.70 times.

83. NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different
C versions of the same question.
Easy
Last year Jabber Company had a net income of $180,000, income
tax expense of $62,000, and interest expense of $20,000. The
company's times interest earned was closest to:
a. 9.00 times.
b. 4.90 times.
c. 13.10 times.
d. 10.00 times.

84. NOTE TO THE INSTRUCTOR: Questions 82, 83, and 84 are different
B versions of the same question.
Easy
Last year Jackson Company had a net income of $160,000, income
tax expense of $66,000, and interest expense of $20,000. The
company's times interest earned was closest to:
a. 9.00 times.
b. 12.30 times.
c. 8.00 times.
d. 3.70 times.

85. The times interest earned ratio of McHugh Company is 4.5 times.
B The interest expense for the year was $20,000, and the
Hard company's tax rate is 40%. The company's net income is:
a. $22,000.
b. $42,000.
c. $54,000.
d. $66,000.

86. Mariah Company has a times interest earned ratio of 3.0 for the
D year just ended. The company's tax rate is 40% and the interest
Hard expense for the year was $25,000. Mariah Company's after-tax
net income was:
a. $50,000.
b. $75,000.
c. $25,000.
d. $30,000.

Managerial Accounting, 9/e 681

87. PFM Company has sales of $210,000, interest expense of $8,000,
A a tax rate of 30%, and a net profit after tax of $35,000. PFM
Hard Company's times interest earned ratio is:
a. 7.25 times.
b. 4.375 times.
c. 5.375 times.
d. 15.5 times.

88. NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different
B versions of the same question.
Easy
Karma Company has total assets of $190,000 and total
liabilities of $90,000. The company's debt-to-equity ratio is
closest to:
a. 0.47 to 1.
b. 0.90 to 1.
c. 0.53 to 1.
d. 0.32 to 1.

89. NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different
D versions of the same question.
Easy
Karl Company has total assets of $170,000 and total liabilities
of $110,000. The company's debt-to-equity ratio is closest to:
a. 0.39 to 1.
b. 0.65 to 1.
c. 0.35 to 1.
d. 1.83 to 1.

90. NOTE TO THE INSTRUCTOR: Questions 88, 89, and 90 are different
A versions of the same question.
Easy
Krakov Company has total assets of $170,000 and total
liabilities of $80,000. The company's debt-to-equity ratio is
closest to:
a. 0.89 to 1.
b. 0.32 to 1.
c. 0.47 to 1.
d. 0.53 to 1.

682Managerial Accounting, 9/e

Reference: 18-1
Selected financial data for Barnstable Company appear below:

19x9 19x8
(in thousands)
Sales ......................... $1,500 $1,200
Operating Expenses ............ 450 400
Interest Expense .............. 75 30
Cost of Goods Sold ............ 900 720
Dividends Declared and Paid ... 30 0

91. For 19x9, the gross margin as a percentage of sales was:

D a. 5%.
Easy b. 60%.
Refer To: c. 10%.
18-1 d. 40%.

92. For 19x9, the net income before taxes as a percentage of sales
D was:
Easy a. 10%.
Refer To: b. 3%.
18-1 c. 8%.
d. 5%.

93. For 19x9, the net operating income as a percentage of sales

C was:
Easy a. 70%.
Refer To: b. 8%.
18-1 c. 10%.
d. 40%.

94. Between 19x8 and 19x9, the times interest earned ratio:
B a. increased.
Medium b. decreased.
Refer To: c. remained the same.
18-1 d. cannot be determined from the data provided.

Managerial Accounting, 9/e 683

Reference: 18-2
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are
different versions of the same question.

Financial statements for Larned Company appear below:

Larned Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 130 $ 100
Accounts receivable, net ................... 150 130
Inventory .................................. 100 100
Prepaid expenses ........................... 20 20
Total current assets ..................... 400 350
Noncurrent assets:
Plant & equipment, net ..................... 1,640 1,600
Total assets ................................. $2,040 $1,950

Current liabilities:
Accounts payable ........................... $ 120 $ 120
Accrued liabilities ........................ 110 80
Notes payable, short term .................. 170 160
Total current liabilities ............... 400 360
Noncurrent liabilities:
Bonds payable .............................. 370 400
Total liabilities ........................ 770 760
Stockholders' equity:
Preferred stock, $20 par, 10% .............. 120 120
Common stock, $10 par ...................... 180 180
Additional paid-in capital--common stock ... 110 110
Retained earnings .......................... 860 780
Total stockholders' equity ............... 1,270 1,190
Total liabilities & stockholders' equity ..... $2,040 $1,950

684Managerial Accounting, 9/e

 Larned Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,930

Cost of goods sold ....................... 2,050
Gross margin ............................. 880
Operating expenses ....................... 350
Net operating income ..................... 530
Interest expense ......................... 40
Net income before taxes .................. 490
Income taxes (30%) ....................... 147
Net income ............................... $ 343

Dividends during 19X6 totalled $263 thousand, of which $12 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $160.

95. Larned Company's earnings per share of common stock for 19X6
A was closest to:
Medium a. $18.39.
Refer To: b. $27.22.
18-2 c. $19.06.
d. $11.03.

96. Larned Company's price-earnings ratio on December 31, 19X6 was

C closest to:
Medium a. 5.88.
Refer To: b. 14.50.
18-2 c. 8.70.
d. 8.40.

97. Larned Company's dividend payout ratio for 19X6 was closest to:
A a. 75.8%.
Medium b. 28.5%.
Refer To: c. 76.7%.
18-2 d. 47.4%.

98. Larned Company's dividend yield ratio on December 31, 19X6 was
A closest to:
Medium a. 8.7%.
Refer To: b. 9.1%.
18-2 c. 8.3%.
d. 5.5%.

99. Larned Company's return on total assets for 19X6 was closest
C to:
Medium a. 15.8%.
Refer To: b. 17.2%.
18-2 c. 18.6%.
d. 17.8%.

Managerial Accounting, 9/e 685

100. Larned Company's return on common stockholders' equity for 19X6
A was closest to:
Medium a. 29.8%.
Refer To: b. 26.9%.
18-2 c. 30.9%.
d. 27.9%.

101. Larned Company's book value per share at the end of 19X6 was
B closest to:
Medium a. $16.11.
Refer To: b. $63.89.
18-2 c. $70.56.
d. $10.00.

Reference: 18-3
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are
different versions of the same question.

Financial statements for Laroche Company appear below:

Laroche Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 180 $ 170
Accounts receivable, net ................... 140 120
Inventory .................................. 160 180
Prepaid expenses ........................... 50 40
Total current assets ..................... 530 510
Noncurrent assets:
Plant & equipment, net ..................... 1,370 1,370
Total assets ................................. $1,900 $1,880

Current liabilities:
Accounts payable ........................... $ 150 $ 190
Accrued liabilities ........................ 70 80
Notes payable, short term .................. 140 150
Total current liabilities ............... 360 420
Noncurrent liabilities:
Bonds payable .............................. 280 300
Total liabilities ........................ 640 720
Stockholders' equity:
Preferred stock, $20 par, 10% .............. 100 100
Common stock, $10 par ...................... 240 240
Additional paid-in capital--common stock ... 180 180
Retained earnings .......................... 740 640
Total stockholders' equity ............... 1,260 1,160
Total liabilities & stockholders' equity ..... $1,900 $1,880

686Managerial Accounting, 9/e

 Laroche Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,250

Cost of goods sold ....................... 1,570
Gross margin ............................. 680
Operating expenses ....................... 270
Net operating income ..................... 410
Interest expense ......................... 30
Net income before taxes .................. 380
Income taxes (30%) ....................... 114
Net income ............................... $ 266

Dividends during 19X6 totaled $166 thousand, of which $10 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $150.

102. Laroche Company's earnings per share of common stock for 19X6
A was closest to:
Medium a. $10.67.
Refer To: b. $15.83.
18-3 c. $3.71.
d. $11.08.

103. Laroche Company's price-earnings ratio on December 31, 19X6 was

C closest to:
Medium a. 13.53.
Refer To: b. 40.43.
18-3 c. 14.06.
d. 9.47.

104. Laroche Company's dividend payout ratio for 19X6 was closest
C to:
Medium a. 22.9%.
Refer To: b. 62.4%.
18-3 c. 60.9%.
d. 38.0%.

105. Laroche Company's dividend yield ratio on December 31, 19X6 was
C closest to:
Medium a. 4.6%.
Refer To: b. 4.1%.
18-3 c. 4.3%.
d. 1.6%.

106. Laroche Company's return on total assets for 19X6 was closest
B to:
Medium a. 14.1%.
Refer To: b. 15.2%.
18-3 c. 14.6%.
d. 13.0%.

Managerial Accounting, 9/e 687

107. Laroche Company's return on common stockholders' equity for
D 19X6 was closest to:
Medium a. 24.0%.
Refer To: b. 21.2%.
18-3 c. 22.0%.
d. 23.1%.

108. Laroche Company's book value per share at the end of 19X6 was
C closest to:
Medium a. $52.50.
Refer To: b. $10.00.
18-3 c. $48.33.
d. $17.50.

Reference: 18-4
NOTE TO THE INSTRUCTOR: Questions 95 to 101, 102 to 108, and 109 to 115 are
different versions of the same question.

Financial statements for Larosa Company appear below:

Larosa Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 150 $ 120
Accounts receivable, net ................... 190 160
Inventory .................................. 150 150
Prepaid expenses ........................... 40 40
Total current assets ..................... 530 470
Noncurrent assets:
Plant & equipment, net ..................... 1,990 1,980
Total assets ................................. $2,520 $2,450

Current liabilities:
Accounts payable ........................... $ 140 $ 170
Accrued liabilities ........................ 10 40
Notes payable, short term .................. 190 200
Total current liabilities ............... 340 410
Noncurrent liabilities:
Bonds payable .............................. 370 400
Total liabilities ........................ 710 810
Stockholders' equity:
Preferred stock, $20 par, 10% .............. 100 100
Common stock, $10 par ...................... 220 220
Additional paid-in capital--common stock ... 250 250
Retained earnings .......................... 1,240 1,070
Total stockholders' equity ............... 1,810 1,640
Total liabilities & stockholders' equity ..... $2,520 $2,450

Larosa Company

688Managerial Accounting, 9/e

 Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,870

Cost of goods sold ....................... 1,300
Gross margin ............................. 570
Operating expenses ....................... 220
Net operating income ..................... 350
Interest expense ......................... 40
Net income before taxes .................. 310
Income taxes (30%) ....................... 93
Net income ............................... $ 217

Dividends during 19X6 totaled $47 thousand, of which $10 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $70.

109. Larosa Company's earnings per share of common stock for 19X6
B was closest to:
Medium a. $3.09.
Refer To: b. $9.41.
18-4 c. $14.09.
d. $9.86.

110. Larosa Company's price-earnings ratio on December 31, 19X6 was

C closest to:
Medium a. 7.10.
Refer To: b. 22.66.
18-4 c. 7.44.
d. 4.97.

111. Larosa Company's dividend payout ratio for 19X6 was closest to:
B a. 21.7%.
Medium b. 17.9%.
Refer To: c. 6.5%.
18-4 d. 10.6%.

112. Larosa Company's dividend yield ratio on December 31, 19X6 was
C closest to:
Medium a. 1.8%.
Refer To: b. 3.1%.
18-4 c. 2.4%.
d. 1.0%.

113. Larosa Company's return on total assets for 19X6 was closest
B to:
Medium a. 8.7%.
Refer To: b. 9.9%.
18-4 c. 7.6%.
d. 9.2%.

Managerial Accounting, 9/e 689

114. Larosa Company's return on common stockholders' equity for 19X6
B was closest to:
Medium a. 12.0%.
Refer To: b. 12.7%.
18-4 c. 13.4%.
d. 12.6%.

115. Larosa Company's book value per share at the end of 19X6 was
A closest to:
Medium a. $77.73.
Refer To: b. $82.27.
18-4 c. $10.00.
d. $21.36.

Reference: 18-5
The Dawson Corporation projects the following for the upcoming year:

Earnings before interest and taxes ............. $35 million

Interest expense ............................... $ 5 million
Preferred stock dividends ...................... $ 4 million
Common stock dividend payout ratio ............. 30%
Average number of common shares outstanding .... 2 million
Effective corporate income tax rate ............ 40%

116. The expected dividend per share of common stock is

A a. $2.10.
Hard b. $2.70.
CMA c. $1.80.
adapted d. $3.90.
Refer To:
18-5

117. If Dawson corporation’s common stock has a price-earnings ratio

B of eight, the market price per share (to the nearest dollar)
Hard would be
CMA a. $125.
adapted b. $56.
Refer To: c. $72.
18-5 d. $68.

Reference: 18-6
NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are
different versions of the same question.

Financial statements for Orange Company appear below:

690Managerial Accounting, 9/e

 Orange Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 130 $ 110
Accounts receivable, net ................... 180 180
Inventory .................................. 160 160
Prepaid expenses ........................... 60 60
Total current assets ..................... 530 510
Noncurrent assets:
Plant & equipment, net ..................... 1,680 1,620
Total assets ................................. $2,210 $2,130

Current liabilities:
Accounts payable ........................... $ 90 $ 100
Accrued liabilities ........................ 60 80
Notes payable, short term .................. 160 180
Total current liabilities ............... 310 360
Noncurrent liabilities:
Bonds payable .............................. 250 300
Total liabilities ........................ 560 660
Stockholders' equity:
Preferred stock, $10 par, 15% ............... 120 120
Common stock, $5 par ....................... 220 220
Additional paid-in capital--common stock ... 210 210
Retained earnings .......................... 1,100 920
Total stockholders' equity ............... 1,650 1,470
Total liabilities & stockholders' equity ..... $2,210 $2,130

Orange Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,830

Cost of goods sold ....................... 1,980
Gross margin ............................. 850
Operating expenses ....................... 340
Net operating income ..................... 510
Interest expense ......................... 30
Net income before taxes .................. 480
Income taxes (30%) ....................... 144
Net income ............................... $ 336

Dividends during 19X6 totaled $156 thousand, of which $18 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $100.

Managerial Accounting, 9/e 691

118. Orange Company's earnings per share of common stock for 19X6
A was closest to:
Medium a. $7.23.
Refer To: b. $2.27.
18-6 c. $10.91.
d. $7.64.

119. Orange Company's dividend yield ratio on December 31, 19X6 was
A closest to:
Medium a. 3.1%.
Refer To: b. 1.1%.
18-6 c. 3.5%.
d. 2.7%.

120. Orange Company's return on total assets for 19X6 was closest
C to:
Medium a. 15.5%.
Refer To: b. 15.9%.
18-6 c. 16.5%.
d. 14.5%.

121. Orange Company's current ratio at the end of 19X6 was closest
D to:
Medium a. 1.24 to 1.
Refer To: b. 0.55 to 1.
18-6 c. 0.44 to 1.
d. 1.71 to 1.

122. Orange Company's accounts receivable turnover for 19X6 was

A closest to:
Medium a. 15.7 times.
Refer To: b. 11.0 times.
18-6 c. 17.7 times.
d. 12.4 times.

123. Orange Company's average sale period (turnover in days) for

B 19X6 was closest to:
Medium a. 23.2 days.
Refer To: b. 29.5 days.
18-6 c. 33.2 days.
d. 20.6 days.

124. Orange Company's times interest earned for 19X6 was closest to:
C a. 16.0 times.
Medium b. 28.3 times.
Refer To: c. 17.0 times.
18-6 d. 11.2 times.

692Managerial Accounting, 9/e

Reference: 18-7
NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are
different versions of the same question.

Financial statements for Orantes Company appear below:

Orantes Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 120 $ 100
Accounts receivable, net ................... 180 160
Inventory .................................. 130 130
Prepaid expenses ........................... 50 50
Total current assets ..................... 480 440
Noncurrent assets:
Plant & equipment, net ..................... 2,010 1,970
Total assets ................................. $2,490 $2,410

Current liabilities:
Accounts payable ........................... $ 120 $ 120
Accrued liabilities ........................ 30 40
Notes payable, short term .................. 170 170
Total current liabilities ............... 320 330
Noncurrent liabilities:
Bonds payable .............................. 270 300
Total liabilities ........................ 590 630
Stockholders' equity:
Preferred stock, $10 par, 10% ............... 120 120
Common stock, $10 par ....................... 200 200
Additional paid-in capital--common stock ... 270 270
Retained earnings .......................... 1,310 1,190
Total stockholders' equity ............... 1,900 1,780
Total liabilities & stockholders' equity ..... $2,490 $2,410

Orantes Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,510

Cost of goods sold ....................... 1,750
Gross margin ............................. 760
Operating expenses ....................... 300
Net operating income ..................... 460
Interest expense ......................... 30
Net income before taxes .................. 430
Income taxes (30%) ....................... 129
Net income ............................... $ 301

Dividends during 19X6 totaled $181 thousand, of which $12 thousand were
preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $280.

Managerial Accounting, 9/e 693

125. Orantes Company's earnings per share of common stock for 19X6
B was closest to:
Medium a. $3.61.
Refer To: b. $14.45.
18-7 c. $15.05.
d. $21.50.

126. Orantes Company's dividend yield ratio on December 31, 19X6 was
A closest to:
Medium a. 3.0%.
Refer To: b. 0.8%.
18-7 c. 2.8%.
d. 3.2%.

127. Orantes Company's return on total assets for 19X6 was closest
C to:
Medium a. 12.3%.
Refer To: b. 11.4%.
18-7 c. 13.1%.
d. 12.7%.

128. Orantes Company's current ratio at the end of 19X6 was closest
D to:
Medium a. 0.54 to 1.
Refer To: b. 1.19 to 1.
18-7 c. 0.35 to 1.
d. 1.50 to 1.

129. Orantes Company's accounts receivable turnover for 19X6 was

C closest to:
Medium a. 19.3 times.
Refer To: b. 13.5 times.
18-7 c. 14.8 times.
d. 10.3 times.

130. Orantes Company's average sale period (turnover in days) for

B 19X6 was closest to:
Medium a. 24.7 days.
Refer To: b. 27.1 days.
18-7 c. 18.9 days.
d. 35.5 days.

131. Orantes Company's times interest earned for 19X6 was closest
B to:
Medium a. 10.0 times.
Refer To: b. 15.3 times.
18-7 c. 14.3 times.
d. 25.3 times.

694Managerial Accounting, 9/e

Reference: 18-8
NOTE TO THE INSTRUCTOR: Questions 118 to 124, 125 to 131, and 132 to 138 are
different versions of the same question.

Financial statements for Oratz Company appear below:

Oratz Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 150 $ 150
Accounts receivable, net ................... 130 130
Inventory .................................. 180 180
Prepaid expenses ........................... 30 30
Total current assets ..................... 490 490
Noncurrent assets:
Plant & equipment, net ..................... 1,430 1,370
Total assets ................................. $1,920 $1,860

Current liabilities:
Accounts payable ........................... $ 70 $ 100
Accrued liabilities ........................ 100 70
Notes payable, short term .................. 230 220
Total current liabilities ............... 400 390
Noncurrent liabilities:
Bonds payable .............................. 300 300
Total liabilities ........................ 700 690
Stockholders' equity:
Preferred stock, $10 par, 5% ............... 120 120
Common stock, $15 par ....................... 140 140
Additional paid-in capital--common stock ... 240 240
Retained earnings .......................... 720 670
Total stockholders' equity ............... 1,220 1,170
Total liabilities & stockholders' equity ..... $1,920 $1,860

Oratz Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,630

Cost of goods sold ....................... 1,140
Gross margin ............................. 490
Operating expenses ....................... 190
Net operating income ..................... 300
Interest expense ......................... 30
Net income before taxes .................. 270
Income taxes (30%) ....................... 81
Net income ............................... $ 189

Dividends during 19X6 totaled $139 thousand, of which $6 thousand were

preferred dividends.
The market price of a share of common stock on December 31, 19X6 was $260.

Managerial Accounting, 9/e 695

132. Oratz Company's earnings per share of common stock for 19X6 was
D closest to:
Medium a. $1.74.
Refer To: b. $28.93.
18-8 c. $20.25.
d. $19.61.

133. Oratz Company's dividend yield ratio on December 31, 19X6 was
C closest to:
Medium a. 5.7%.
Refer To: b. 5.2%.
18-8 c. 5.5%.
d. 0.5%.

134. Oratz Company's return on total assets for 19X6 was closest to:
B a. 8.9%.
Medium b. 11.1%.
Refer To: c. 10.5%.
18-8 d. 10.0%.

135. Oratz Company's current ratio at the end of 19X6 was closest
B to:
Medium a. 0.57 to 1.
Refer To: b. 1.23 to 1.
18-8 c. 0.51 to 1.
d. 1.26 to 1.

136. Oratz Company's accounts receivable turnover for 19X6 was

B closest to:
Medium a. 9.1 times.
Refer To: b. 12.5 times.
18-8 c. 8.8 times.
d. 6.3 times.

137. Oratz Company's average sale period (turnover in days) for 19X6
D was closest to:
Medium a. 29.1 days.
Refer To: b. 40.3 days.
18-8 c. 41.6 days.
d. 57.6 days.

138. Oratz Company's times interest earned for 19X6 was closest to:
C a. 6.3 times.
Medium b. 16.3 times.
Refer To: c. 10.0 times.
18-8 d. 9.0 times.

696Managerial Accounting, 9/e

Reference: 18-9
Selected data for the MK Company follow:

Current Year Prior Year

Preferred stock, 8%, par value $50 ....... $250,000 $250,000
Common stock, par value $10 .............. 500,000 500,000
Retained earnings at end of year ......... 257,000 240,000
Net income ............................... 102,000 90,000
Dividends paid on preferred stock ........ 20,000 20,000
Dividends paid on common stock ........... 65,000 60,000
Quoted market price per common
share at year end...................... 25.00 20.00

139. The price-earnings ratio for the prior year was:

B a. 15.8 to 1.
Hard b. 14.3 to 1.
Refer To: c. 12.2 to 1.
17-9 d. 11.1 to 1.

140. The dividend yield ratio on common stock for the current year
A was
Medium (rounded to the nearest tenth of a percent):
Refer To: a. 5.2%
17-9 b. 6.8%.
c. 6.6%.
d. 7.4%.

141. MK Company's return on common stockholders' equity for the

D current year was (rounded to the nearest tenth of a percent):
Hard a. 10.2%.
Refer To: b. 8.2%.
17-9 c. 13.6%.
d. 10.9%.

142. The dividend payout ratio for the prior year was:
D a. 55.6%
Medium b. 140%.
Refer To: c. 114.3%.
17-9 d. 85.7%.

143. The book value per share for the current year is (rounded to
C the nearest cent:
Medium a. $22.18.
Refer To: b. $18.31.
17-9 c. $15.14.
d. $20.14.

Managerial Accounting, 9/e 697

Reference: 18-10
Lisa Inc.'s balance sheet appears below:

Lisa Inc.
Statement of Financial Position
December 31
(in thousands)
19X7 19X6
Cash ................................... $ 30 $ 25
Marketable securities ................... 20 15
Accounts receivable (net) ............... 45 30
Inventories ............................. 60 50
Prepaid expenses ........................ 15 20
Total current assets ................... 170 140
Land .................................... 155 125
Building (net) .......................... 80 90
Equipment (net) ......................... 95 100
Total long-term assets ................. 330 315
Total Assets ......................... $500 $455

Accounts payable ........................ $ 47 $ 28

Accrued interest ........................ 15 15
Short-term notes payable ................ 23 12
Total current liabilities .............. 85 55
Long-term otes payable .................. 10 10
Bonds payable ........................... 15 15
Total long-term liabilities ............ 25 25
Total liabilities ...................... 110 80
Preferred stock ($100 par value, 5%) .... 100 100
Common Stock ($10 par value) ............ 150 150
Additional paid-in capital--common stock 75 75
Retained earnings ....................... 65 50
Total shareholders’ equity ............. 390 375
Total liabilities & equity ........... $500 $455

The company's sales for the year were $300,000, its cost of goods sold was
$220,000, and its net income was $35,000. All sales were on credit.
Preferred dividends for the year were $5,000.

144. Lisa Inc.’s acid test (quick) ratio at December 31, 19X7, was
B closest to:
Medium a. 0.6 to 1.
CMA b. 1.1 to 1.
adapted c. 1.8 to 1.
Refer To: d. 2.0 to 1.
18-10

698Managerial Accounting, 9/e

145. Lisa Inc.’s accounts receivable turnover for 19X7 was closest
D to:
Medium a. 4.9 times.
CMA b. 5.9 times.
adapted c. 6.7 times.
Refer To: d. 8.0 times.
18-10

146. Lisa Inc.’s inventory turnover for 19X7 was closest to:
B a. 3.7 times.
Medium b. 4.0 times.
CMA c. 4.4 times.
adapted d. 5.0 times.
Refer To:
18-10

147. Lisa Inc.’s book value per share of common stock at December
C 31, 19X7, was closest to:
Medium a. $10.00.
CMA b. $11.25.
adapted c. $19.33.
Refer To: d. $18.33.
18-10

148. Lisa Inc.’s return on common stockholders' equity for 19X7 was
B closest to:
Medium a. 7.8%.
CMA b. 10.6%.
adapted c. 10.9%.
Refer To: d. 12.4%.
18-10

Managerial Accounting, 9/e 699

Reference: 18-11
NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are
different versions of the same question.

Financial statements for Marcell Company appear below:

Marcell Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 160 $ 150
Accounts receivable, net ................... 110 110
Inventory .................................. 180 180
Prepaid expenses ........................... 20 20
Total current assets ..................... 470 460
Noncurrent assets:
Plant & equipment, net ..................... 1,700 1,680
Total assets ................................. $2,170 $2,140

Current liabilities:
Accounts payable ........................... $ 110 $ 150
Accrued liabilities ........................ 60 60
Notes payable, short term .................. 280 290
Total current liabilities ............... 450 500
Noncurrent liabilities:
Bonds payable .............................. 480 500
Total liabilities ........................ 930 1,000
Stockholders' equity:
Preferred stock, $10 par, 8% ............... 100 100
Common stock, $5 par ....................... 140 140
Additional paid-in capital--common stock ... 280 280
Retained earnings .......................... 720 620
Total stockholders' equity ............... 1,240 1,140
Total liabilities & stockholders' equity ..... $2,170 $2,140

Marcell Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,550

Cost of goods sold ....................... 1,780
Gross margin ............................. 770
Operating expenses ....................... 300
Net operating income ..................... 470
Interest expense ......................... 50
Net income before taxes .................. 420
Income taxes (30%) ....................... 126
Net income ............................... $ 294

700Managerial Accounting, 9/e

149. Marcell Company's working capital (in thousands of dollars) at
B the end of 19X6 was closest to:
Medium a. $470.
Refer To: b. $20.
18-11 c. $520.
d. $1,240.

150. Marcell Company's current ratio at the end of 19X6 was closest
A to:
Medium a. 1.04 to 1.
Refer To: b. 0.42 to 1.
18-11 c. 0.48 to 1.
d. 1.22 to 1.

151. Marcell Company's acid-test (quick) ratio at the end of 19X6

C was closest to:
Medium a. 0.33 to 1.
Refer To: b. 1.35 to 1.
18-11 c. 0.60 to 1.
d. 0.74 to 1.

152. Marcell Company's accounts receivable turnover for 19X6 was

C closest to:
Medium a. 16.2 times.
Refer To: b. 9.9 times.
18-11 c. 23.2 times.
d. 14.2 times.

153. Marcell Company's average collection period (age of

B receivables) for 19X6 was closest to:
Medium a. 22.6 days.
Refer To: b. 15.7 days.
18-11 c. 25.8 days.
d. 36.9 days.

154. Marcell Company's inventory turnover for 19X6 was closest to:
D a. 16.2 times.
Medium b. 23.2 times.
Refer To: c. 14.2 times.
18-11 d. 9.9 times.

155. Marcell Company's average sale period (turnover in days) for

C 19X6 was closest to:
Medium a. 15.7 days.
Refer To: b. 25.8 days.
18-11 c. 36.9 days.
d. 22.6 days.

Managerial Accounting, 9/e 701

Reference: 18-12
NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are
different versions of the same question.

Financial statements for March Company appear below:

March Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 220 $ 190
Accounts receivable, net ................... 160 150
Inventory .................................. 150 150
Prepaid expenses ........................... 50 40
Total current assets ..................... 580 530
Noncurrent assets:
Plant & equipment, net ..................... 1,560 1,560
Total assets ................................. $2,140 $2,090

Current liabilities:
Accounts payable ........................... $ 90 $ 100
Accrued liabilities ........................ 80 60
Notes payable, short term .................. 230 230
Total current liabilities ............... 400 390
Noncurrent liabilities:
Bonds payable .............................. 450 500
Total liabilities ........................ 850 890
Stockholders' equity:
Preferred stock, $10 par, 8% ............... 120 120
Common stock, $5 par ....................... 180 180
Additional paid-in capital--common stock ... 220 220
Retained earnings .......................... 770 680
Total stockholders' equity ............... 1,290 1,200
Total liabilities & stockholders' equity ..... $2,140 $2,090

March Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,610

Cost of goods sold ....................... 1,120
Gross margin ............................. 490
Operating expenses ....................... 190
Net operating income ..................... 300
Interest expense ......................... 50
Net income before taxes .................. 250
Income taxes (30%) ....................... 75
Net income ............................... $ 175

702Managerial Accounting, 9/e

156. March Company's working capital (in thousands of dollars) at
C the end of 19X6 was closest to:
Medium a. $520.
Refer To: b. $1,290.
18-12 c. $180.
d. $580.

157. March Company's current ratio at the end of 19X6 was closest
D to:
Medium a. 1.27 to 1.
Refer To: b. 0.47 to 1.
18-12 c. 0.49 to 1.
d. 1.45 to 1.

158. March Company's acid-test (quick) ratio at the end of 19X6 was
A closest to:
Medium a. 0.95 to 1.
Refer To: b. 0.39 to 1.
18-12 c. 1.90 to 1.
d. 0.53 to 1.

159. March Company's accounts receivable turnover for 19X6 was

B closest to:
Medium a. 7.2 times.
Refer To: b. 10.4 times.
18-12 c. 7.5 times.
d. 10.7 times.

160. March Company's average collection period (age of receivables)

B for 19X6 was closest to:
Medium a. 48.9 days.
Refer To: b. 35.1 days.
18-12 c. 34.0 days.
d. 50.5 days.

161. March Company's inventory turnover for 19X6 was closest to:
A a. 7.5 times.
Medium b. 10.4 times.
Refer To: c. 10.7 times.
18-12 d. 7.2 times.

162. March Company's average sale period (turnover in days) for 19X6
A was closest to:
Medium a. 48.9 days.
Refer To: b. 34.0 days.
18-12 c. 35.1 days.
d. 50.5 days.

Managerial Accounting, 9/e 703

Reference: 18-13
NOTE TO THE INSTRUCTOR: Questions 149 to 155, 156 to 162, and 163 to 169 are
different versions of the same question.

Financial statements for Marcial Company appear below:

Marcial Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 140 $ 140
Accounts receivable, net ................... 110 110
Inventory .................................. 140 130
Prepaid expenses ........................... 50 50
Total current assets ..................... 440 430
Noncurrent assets:
Plant & equipment, net ..................... 1,550 1,480
Total assets ................................. $1,990 $1,910

Current liabilities:
Accounts payable ........................... $ 120 $ 170
Accrued liabilities ........................ 10 40
Notes payable, short term .................. 110 100
Total current liabilities ............... 240 310
Noncurrent liabilities:
Bonds payable .............................. 390 400
Total liabilities ........................ 630 710
Stockholders' equity:
Preferred stock, $10 par, 8% ............... 120 120
Common stock, $5 par ....................... 200 200
Additional paid-in capital--common stock ... 250 250
Retained earnings .......................... 790 630
Total stockholders' equity ............... 1,360 1,200
Total liabilities & stockholders' equity ..... $1,990 $1,910

Marcial Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,630

Cost of goods sold ....................... 1,140
Gross margin ............................. 490
Operating expenses ....................... 190
Net operating income ..................... 300
Interest expense ......................... 40
Net income before taxes .................. 260
Income taxes (30%) ....................... 78
Net income ............................... $ 182

704Managerial Accounting, 9/e

163. Marcial Company's working capital (in thousands of dollars) at
D the end of 19X6 was closest to:
Medium a. $440.
Refer To: b. $570.
18-13 c. $1,360.
d. $200.

164. Marcial Company's current ratio at the end of 19X6 was closest
A to:
Medium a. 1.83 to 1.
Refer To: b. 0.38 to 1.
18-13 c. 0.35 to 1.
d. 1.22 to 1.

165. Marcial Company's acid-test (quick) ratio at the end of 19X6

C was closest to:
Medium a. 0.76 to 1.
Refer To: b. 1.32 to 1.
18-13 c. 1.04 to 1.
d. 0.25 to 1.

166. Marcial Company's accounts receivable turnover for 19X6 was

B closest to:
Medium a. 8.4 times.
Refer To: b. 14.8 times.
18-13 c. 12.1 times.
d. 10.4 times.

167. Marcial Company's average collection period (age of

A receivables) for 19X6 was closest to:
Medium a. 24.6 days.
Refer To: b. 35.2 days.
18-13 c. 43.2 days.
d. 30.2 days.

168. Marcial Company's inventory turnover for 19X6 was closest to:
A a. 8.4 times.
Medium b. 12.1 times.
Refer To: c. 14.8 times.
18-13 d. 10.4 times.

169. Marcial Company's average sale period (turnover in days) for

C 19X6 was closest to:
Medium a. 35.2 days.
Refer To: b. 30.2 days.
18-13 c. 43.2 days.
d. 24.6 days.

Managerial Accounting, 9/e 705

Reference: 18-14
The following financial data have been taken from the records of CPZ
Enterprises.

Accounts receivable ...................... $200,000

Accounts payable ......................... 80,000
Bonds payable, due in 10 years ........... 300,000
Cash ..................................... 100,000
Interest payable, due in three months .... 10,000
Inventory ................................ 440,000
Land ..................................... 250,000
Notes payable, due in six months ......... 50,000

170. The current ratio for CPZ Enterprises is:

D a. 1.68.
Medium b. 2.14.
CMA c. 5.00.
adapted d. 5.29.
Refer To:
18-14

171. What is the company’s acid test (quick) ratio?

C a. 0.68.
Medium b. 1.68.
CMA c. 2.14.
adapted d. 2.31.
Refer To:
18-14

172. What will happen to the ratios below if CPZ Enterprises uses
A cash to pay 50% of its accounts payable?
Hard
CMA Current Ratio Acid-test Ratio
adapted a. increase increase
Refer To: b. decrease decrease
18-14 c. increase decrease
d. decrease increase

Reference: 18-15
At December 31, Curry Co. had the following balances in selected asset
accounts:

19x7 19x6
Cash ........................... $ 300 $ 200
Accounts receivable, net ....... 1,200 800
Inventory ...................... 500 300
Prepaid expenses ............... 100 60
Other assets ................... 400 250
Total assets ................... $2,500 $1,610

Curry had current liabilities of $1,000 at December 31, 19x7, and credit
sales of $7,200 for 19x7.

706Managerial Accounting, 9/e

173. Curry Company’s acid-test (quick) ratio at December 31, 19x7
A was closest to:
Medium a. 1.5 to 1.
CPA b. 1.6 to 1.
adapted c. 2.0 to 1.
Refer To: d. 2.1 to 1.
18-15

174. Drew Company's average collection period (age of receivables)

C for 19x7 was closest to:
Medium a. 30.4 days.
CPA b. 40.6 days.
adapted c. 50.7 days.
Refer To: d. 60.8 days.
18-15

Reference: 18-16
NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are
different versions of the same question.

Financial statements for Narita Company appear below:

Narita Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 130 $ 130
Accounts receivable, net ................... 210 180
Inventory .................................. 120 120
Prepaid expenses ........................... 60 50
Total current assets ..................... 520 480
Noncurrent assets:
Plant & equipment, net ..................... 1,660 1,660
Total assets ................................. $2,180 $2,140

Current liabilities:
Accounts payable ........................... $ 150 $ 140
Accrued liabilities ........................ 50 60
Notes payable, short term .................. 180 200
Total current liabilities ............... 380 400
Noncurrent liabilities:
Bonds payable .............................. 260 300
Total liabilities ........................ 640 700
Stockholders' equity:
Preferred stock, $10 par, 6% ............... 120 120
Common stock, $2 par ....................... 140 140
Additional paid-in capital--common stock ... 180 180
Retained earnings .......................... 1,100 1,000
Total stockholders' equity ............... 1,540 1,440
Total liabilities & stockholders' equity ..... $2,180 $2,140

Managerial Accounting, 9/e 707

 Narita Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,570

Cost of goods sold ....................... 1,790
Gross margin ............................. 780
Operating expenses ....................... 310
Net operating income ..................... 470
Interest expense ......................... 30
Net income before taxes .................. 440
Income taxes (30%) ....................... 132
Net income ............................... $ 308

175. Narita Company's times interest earned for 19X6 was closest to:
D a. 14.7 times.
Medium b. 26.0 times.
Refer To: c. 10.3 times.
18-16 d. 15.7 times.

176. Narita Company's debt-to-equity ratio at the end of 19X6 was

D closest to:
Medium a. 0.17 to 1.
Refer To: b. 0.58 to 1.
18-16 c. 0.25 to 1.
d. 0.42 to 1.

Reference: 18-17
NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are
different versions of the same question.

Financial statements for Narlock Company appear below:

Narlock Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 120 $ 120
Accounts receivable, net ................... 150 150
Inventory .................................. 130 120
Prepaid expenses ........................... 90 80
Total current assets ..................... 490 470
Noncurrent assets:
Plant & equipment, net ..................... 1,670 1,600
Total assets ................................. $2,160 $2,070

708Managerial Accounting, 9/e

 Current liabilities:
Accounts payable ........................... $ 100 $ 100
Accrued liabilities ........................ 60 70
Notes payable, short term .................. 250 290
Total current liabilities ............... 410 460
Noncurrent liabilities:
Bonds payable .............................. 480 500
Total liabilities ........................ 890 960
Stockholders' equity:
Preferred stock, $10 par, 6% ............... 100 100
Common stock, $2 par ....................... 200 200
Additional paid-in capital--common stock ... 150 150
Retained earnings .......................... 820 660
Total stockholders' equity ............... 1,270 1,110
Total liabilities & stockholders' equity ..... $2,160 $2,070

Narlock Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,250

Cost of goods sold ....................... 1,570
Gross margin ............................. 680
Operating expenses ....................... 270
Net operating income ..................... 410
Interest expense ......................... 50
Net income before taxes .................. 360
Income taxes (30%) ....................... 108
Net income ............................... $ 252

177. Narlock Company's times interest earned for 19X6 was closest
B to:
Medium a. 7.2 times.
Refer To: b. 8.2 times.
18-17 c. 13.6 times.
d. 5.0 times.

178. Narlock Company's debt-to-equity ratio at the end of 19X6 was

A closest to:
Medium a. 0.70 to 1.
Refer To: b. 0.32 to 1.
18-17 c. 0.38 to 1.
d. 1.09 to 1.

Managerial Accounting, 9/e 709

Reference: 18-18
NOTE TO THE INSTRUCTOR: Questions 175 to 176, 177 to 178, and 179 to 180 are
different versions of the same question.

Financial statements for Narumi Company appear below:

Narumi Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 150 $ 150
Accounts receivable, net ................... 140 130
Inventory .................................. 130 130
Prepaid expenses ........................... 40 30
Total current assets ..................... 460 440
Noncurrent assets:
Plant & equipment, net ..................... 1,340 1,310
Total assets ................................. $1,800 $1,750

Current liabilities:
Accounts payable ........................... $ 120 $ 110
Accrued liabilities ........................ 80 80
Notes payable, short term .................. 180 230
Total current liabilities ............... 380 420
Noncurrent liabilities:
Bonds payable .............................. 510 500
Total liabilities ........................ 890 920
Stockholders' equity:
Preferred stock, $10 par, 6% ............... 120 120
Common stock, $2 par ....................... 160 160
Additional paid-in capital--common stock ... 200 200
Retained earnings .......................... 430 350
Total stockholders' equity ............... 910 830
Total liabilities & stockholders' equity ..... $1,800 $1,750

Narumi Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,050

Cost of goods sold ....................... 1,430
Gross margin ............................. 620
Operating expenses ....................... 240
Net operating income ..................... 380
Interest expense ......................... 50
Net income before taxes .................. 330
Income taxes (30%) ....................... 99
Net income ............................... $ 231

710Managerial Accounting, 9/e

179. Narumi Company's times interest earned for 19X6 was closest to:
B a. 12.4 times.
Medium b. 7.6 times.
Refer To: c. 6.6 times.
18-18 d. 4.6 times.

180. Narumi Company's debt-to-equity ratio at the end of 19X6 was

C closest to:
Medium a. 2.07 to 1.
Refer To: b. 0.42 to 1.
18-18 c. 0.98 to 1.
d. 0.56 to 1.

Essay

181. M. K. Berry is the managing director of CE Ltd. a small,

Medium family-owned company which manufactures cutlery. His company
CIMA (UK) belongs to a trade association which publishes a monthly
adapted magazine. The latest issue of the magazine contains a very
brief article based on the analysis of the accounting
statements published by the 40 companies which manufacture this
type of product. The article contains the following table:

Average for all companies

in the industry
Return on stockholders' equity ...... 33%
Return on total assets .............. 29%
Gross margin percentage ............. 30%
Current ratio ....................... 1.9:1
Average sale period ................. 37 days
Average collection period ........... 41 days

CE Ltd's latest financial statements are as follows:

CE Ltd.
Income Statement
for the year ended 31 October
(in thousands)

Sales ...................................... £900

Cost of goods sold ......................... 720
Gross margin ............................... 180
Selling and administrative expenses ........ 55
Interest ................................... 15
Net income ................................. £110

The country in which the company operates has no corporate

income tax. No dividends were paid during the year. All sales
are on account.

CE Ltd.

Managerial Accounting, 9/e 711

 Balance Sheets
as of 31 October
(in thousands)

This Year Last Year

Current assets:
Cash ............................... £ 5 £ 20
Accounts receivable ................ 120 110
Inventories ........................ 96 80
Noncurrent assets .................... 500 460
Total assets ....................... £721 £670

Current liabilities:
Accounts payable ................... £147 £206
Noncurrent liabilities:
Bonds payable ...................... 150 150
Common stock ......................... 100 100
Retained earnings .................... 324 214
Total liabilities and
stockholders’ equity ............ £721 £670

Required:

a. Calculate each of the ratios listed in the magazine article

for this year for CE, and comment briefly on CE Ltd's
performance in comparison to the industrial averages.

b. Explain why it could be misleading to compare CE Ltd's

ratios with those taken from the article.

Answer:
a.
Return on common stockholders’ equity:
Net income = £110
Preferred dividends = £0
Average common stockholders’
equity = [(£100 + £324) + (£100 + £214)] ÷ 2
= £369
Return on common stockholders’ equity = (£110 - £0) ÷ £369
= 29.8% (rounded)

Return on total assets:

Net income = £110
Tax rate = 0%
Interest expense = £15
Average total assets = (£721 + £670) ÷ 2 = £695.5
Return on total assets = [£110 + £15x(1 - 0.00)] ÷ £695.5
= 18.0% (rounded)

712Managerial Accounting, 9/e

 Gross margin percentage:
Gross margin = £180
Sales = £900
Gross margin percentage = £180/£900 = 20%

Current ratio:
Current assets = £5 + £120 + £96 = £221
Current liabilities = £147
Current ratio = £221/£147 = 1.5:1 (rounded)

Average sale period:

Cost of goods sold = £720
Average inventory balance = (£96 + £80)/2 = £88
Inventory turnover = £720/£88 = 8.2 (rounded)
Average sale period = 365 days/8.2 = 45 days (rounded)

Average collection period:

Sales on account = £900
Average accounts receivable balance = (£120 + £110)/2 =
£115
Accounts receivable turnover = £900/£115 = 7.8 (rounded)
Average collection period = 365 days/7.8 = 47 days
(rounded)

CE Ltd's return on stockholders' equity is not as good as the

industry’s average. For every pound invested, shareholders are
obtaining a return which is smaller than they should expect,
based on the article's figures. Similarly, the return on total
assets is much less than the average. This indicates that the
company is unable to make good use of the funds invested in
the company.

CE Ltd's gross margin percentage is also lower than average--

perhaps because it's selling prices are lower than the average
or its cost of sales are higher.

The current ratio indicates that CE Ltd's current assets are

greater than its current liabilities by a factor of 1.5. The
industry average shows an even higher figure, with current
assets amounting to almost double current liabilities.

Most companies aim to turn over inventory as quickly as

possible, in order to improve cash flow. CE Ltd is not
managing to do this as quickly as the industry's average of
37 days. Similarly, companies should try to obtain payment
from customers as soon as possible. CE Ltd is taking much
longer to do this than the average for the industry.

Managerial Accounting, 9/e 713

 b.
Care must be taken when comparing CE Ltd's ratios with
industry averages because there may be differences in
accounting methods. Although accounting standards have
reduced the range of acceptable accounting policies, there
is still scope for different firms to apply different
accounting policies. For example, one firm may use straight-
line depreciation, while another may use accelerated
depreciation. These variations make comparisons difficult.

Size differences may also mean that ratios are not

comparable. A very large manufacturing business should be
able to achieve economies of scale which are not possible
for CE Ltd. For example, large companies may be able to
negotiate sizable discounts from suppliers.

A third problem arises from differences in product range. CE

Ltd may produce cutlery which is sold at the top end of the
market, for very high prices, and in small volumes.
Alternatively, it may be producing high-volume, low quality
cutlery for the catering industry. Either situation will
reduce the value of comparisons with the industry average.

714Managerial Accounting, 9/e

182. Comparative financial statements for Springville Company for
Medium the last two years appear below. The market price of
Springville's common stock was $25 per share on December 31,
Year 2. During Year 2, dividends of $2,000,000 were paid to
preferred stockholders and $10,000,000 to stockholders.

Springville Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities ........... $ 6,000 $ 4,800
Accounts receivable, net ................. 20,000 16,800
Inventory ................................ 28,000 28,800
Total current assets ................... 54,000 50,400
Noncurrent assets:
Investments............................... 75,000 81,600
Plant & equipment, net ................... 12,000 12,000
Total assets ............................... $141,000 $144,000

Current liabilities:
Accounts payable ......................... $ 7,000 $ 6,000
Accrued liabilities ...................... 1,000 1,200
Total current liabilities ............. 8,000 7,200
Noncurrent liabilities:
Bonds payable ............................ 24,000 24,000
Total liabilities ...................... 32,000 31,200
Stockholders' equity:
Preferred stock, 8%, 1,000,000 shares..... 20,000 20,000
Common stock, no par, 5,000,000 shares.... 30,000 30,000
Retained earnings ........................ 59,000 62,800
Total stockholders' equity ............. 109,000 112,800
Total liabilities & stockholders' equity ... $141,000 $144,000

Springville Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) ................... $280,000

Cost of goods sold ....................... 200,000
Gross margin ............................. $ 80,000
Operating expenses ....................... 61,333
Net operating income ..................... 18,667
Interest expense ......................... 5,000
Net income before taxes .................. 13,667
Income taxes (40%) ....................... 5,467
Net income ............................... $ 8,200

Managerial Accounting, 9/e 715

 Required:

Compute the following for Year 2:

a. Dividend payout ratio.
b. Dividend yield ratio.
c. Price-earnings ratio.
d. Accounts receivable turnover.
e. Inventory turnover.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Was financial leverage positive or negative for the year?
Explain.

Answer:
a. Dividend payout ratio = Dividends per share
÷ Earnings per share.
= ($10,000,000/5,000,000) ÷ (($8,200,000 - $2,000,000)
/5,000,000))
= $2.00  $1.24
= 161.3%.

b. Dividend yield ratio = Dividends paid per share

 Market price per share
= $2.00 ÷ $25
= 8%.

c. Price-earnings ratio = Market price per share

÷ Earnings per share
= $25 ÷ (($8,200,000 - $2,000,000)/5,000,000))
= 20.16.

d. Accounts receivable turnover = Sales on account

 Average accounts receivable balance
= $280,000  (($16,800 + $20,000)/2))
= 15.22 times.

e. Inventory turnover = Cost of goods sold

÷ Average inventory balance
= $200,000 ÷ (($28,800 + $28,000)/2))
= 7.04 times

f. Return on total assets

= [Net income + ((Interest expense x (1 - Tax rate))]
 Average total assets
= [$8,200,000 + 5,000,000 x (1 - 0.40)]
 [($144,000,000 + $141,000,000)/2]
= 7.9%

716Managerial Accounting, 9/e

 g. Return on common stockholders' equity
= (Net income - preferred dividends)
 Average common stockholders' equity
= ($8,200,000 - $2,000,000)  [($92,800,000 + $89,000,000)/2]
= 6.8%

h. Financial leverage was negative, since the rate of return to

the common stockholders (6.8%) was less than the rate of return
on total assets (7.8%).

183. Financial statements for Praeger Company appear below:

Medium
Praeger Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 100 $ 100
Accounts receivable, net ................... 170 170
Inventory .................................. 110 110
Prepaid expenses ........................... 60 60
Total current assets ..................... 440 440
Noncurrent assets:
Plant & equipment, net ..................... 2,020 1,990
Total assets ................................. $2,460 $2,430

Current liabilities:
Accounts payable ........................... $ 140 $ 170
Accrued liabilities ........................ 70 50
Notes payable, short term .................. 100 120
Total current liabilities ............... 310 340
Noncurrent liabilities:
Bonds payable .............................. 500 500
Total liabilities ........................ 810 840
Stockholders' equity:
Preferred stock, $5 par, 5% ................ 100 100
Common stock, $5 par ....................... 200 200
Additional paid-in capital--common stock ... 200 200
Retained earnings .......................... 1,150 1,090
Total stockholders' equity ............... 1,650 1,590
Total liabilities & stockholders' equity ..... $2,460 $2,430

Managerial Accounting, 9/e 717

 Praeger Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,100

Cost of goods sold ....................... 770
Gross margin ............................. 330
Operating expenses ....................... 130
Net operating income ..................... 200
Interest expense ......................... 50
Net income before taxes .................. 150
Income taxes (30%) ....................... 45
Net income ............................... $ 105

Dividends during 19X6 totalled $45 thousand, of which $5

thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $30.

Required:

Compute the following for 19X6:

a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test (quick) ratio.
k. Accounts receivable turnover.
l. Average collection period (age of receivables).
m. Inventory turnover.
n. Average sale period (turnover in days).
o. Times interest earned.
p. Debt-to-equity ratio.

Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares
outstanding*
= ($105 - $5) ÷ 40
= $2.50

*Number of common
shares outstanding = Common stock ÷ Par value
= $200 ÷ $5
= 40

718Managerial Accounting, 9/e

 b. Price-earnings ratio = Market price per share
÷ Earnings per share (see above)
= $30 ÷ $2.50
= 12.0

c. Dividend payout ratio = Dividends per share*

÷ Earnings per share (see above)
= $1.00 ÷ $2.50
= 40.0%

*Dividends per share = Common dividends ÷ Common shares**

= $40 ÷ 40
= $1.00
**See above

d. Dividend yield ratio = Dividends per share*

÷ Market price per share
= $1.00 ÷ $30.00
= 3.33%
*See above

e. Return on total assets = Adjusted net income*

÷ Average total assets**
= $140 ÷ $2,445
= 5.73%

*Adjusted net income = Net income

+ [Interest expense x (1-Tax rate)]
= $105 + [$50 x (1 – 0.30)]
= $140

**Average total assets = ($2,460 + $2,430) ÷ 2

= $2,445

f. Return on common
stockholders' equity = (Net income - Preferred dividends)
÷ Average common stockholders' equity*
= ($105 - $5) ÷ $1,520
= 6.58%

*Average common stockholders' equity = ($1,550 + $1,490) ÷ 2

= $1,520

g. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $1,550 ÷ 40
= $38.75

*Number of common
shares outstanding = Common stock ÷ Par value
= $200 ÷ $5
= 40

Managerial Accounting, 9/e 719

 h. Working capital = Current assets - Current liabilities
= $440 - $310
= $130

i. Current ratio = Current assets ÷ Current liabilities

= $440 ÷ $310
= 1.42 to 1

j. Acid-test ratio = Quick assets* ÷ Current liabilities

= $270 ÷ $310
= 0.87 to 1

*Quick assets = Cash + Marketable securities

+ Current receivables
= $100 + $170
= $270

k. Accounts receivable
turnover = Sales on account ÷ Average accounts
receivable*
= $1,100 ÷ $170
= 6.47 times

*Average accounts receivable = ($170 + $170) ÷ 2

= $170

l. Average collection
period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 6.47
= 56.4 days
*See above

m. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $770 ÷ $110
= 7.00 times

*Average inventory = ($110 + $110)÷2

= $110

n. Average sale period = 365 days ÷ Inventory turnover*

= 365 ÷7.00
= 52.1 days
*See above

o. Times interest earned = Net operating income

÷ Interest expense
= $200 ÷ $50
= 4.00 times

p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $810 ÷ $1,650
= 0.49 to 1

720Managerial Accounting, 9/e

184. Financial statements for AAR Company appear below:
Medium
AAR Company
Statement of Financial Position
December 31

Current assets:
Cash and marketable securities ............. $ 21,000
Accounts receivable, net ................... 160,000
Inventory .................................. 300,000
Prepaid expenses ........................... 9,000
Total current assets ..................... 490,000
Noncurrent assets:
Plant & equipment, net ..................... 810,000
Total assets ................................. $1,300,000

Current liabilities:
Accounts payable ........................... $ 75,000
Accrued liabilities ........................ 25,000
Notes payable, short term .................. 100,000
Total current liabilities ............... 200,000
Noncurrent liabilities:
Bonds payable .............................. 300,000
Total liabilities ........................ 500,000
Stockholders' equity:
Common stock, $5 par ....................... 100,000
Retained earnings .......................... 700,000
Total stockholders' equity ............... 800,000
Total liabilities & stockholders' equity ..... $1,300,000

AAR Company
Income Statement
For the Year Ended December 31
(dollars in thousands)

Sales (all on account) .................. $2,100,000

Cost of goods sold ...................... 1,770,000
Gross margin ............................ 330,000
Operating expenses ...................... 130,000
Net operating income .................... 200,000
Interest expense ........................ 50,000
Net income before taxes ................. 150,000
Income taxes (30%) ...................... 45,000
Net income .............................. $ 105,000

AAR Company paid dividends of $3.15 per share during the year.
The market price of the company's stock at December 31 was $63
per share. Assets at the beginning of the year totaled
$1,100,000, and stockholders' equity totaled $725,000. The
balance of accounts receivable at the beginning of the year was
$150,000. The balance in inventory at the beginning of the year
was $250,000.

Managerial Accounting, 9/e 721

 Required:

Compute the following:

a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
g. Dividend payout ratio.
h. Price-earnings ratio.
i. Return on total assets.
j. Return on common stockholders' equity.
k. Was financial leverage positive or negative for the year.
Explain.

Answer:

a. Current ratio = Current assets ÷ Current liabilities

= $490,000 ÷ $200,000
= 2.45 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $181,000 ÷ $200,000
= 0.91 to 1

*Quick assets = Cash + Marketable securities

+ Current receivables
= $21,000 + $160,000
= $181,000

c. Accounts receivable
turnover = Sales on account ÷ Average accounts receivable*
= $2,100,000 ÷ $155,000
= 13.55 times

*Average accounts receivable = ($160,000 + $150,000) ÷ 2

= $155,000.

Average collection
period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 13.55
= 26.94 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $1,770,000 ÷ $275,000
= 6.4 times

*Average inventory = ($300,000 + $250,000) ÷ 2

= $275,000.

722Managerial Accounting, 9/e

 e. Times interest earned = Net operating income
÷ Interest expense
= $200,000 ÷ $50,000
= 4.00 times

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $500,000 ÷ $800,000
= 0.625 to 1

g. Dividend payout ratio = Dividends per share

÷ Earnings per share.
= $3.15 ÷ ($105,000/20,000 shares)
= $3.15  $5.25
= 60%.

h. Dividend yield ratio = Dividends paid per share

 Market price per share
= $3.15 ÷ $63.00
= 5%.

i. Price-earnings ratio = Market price per share

÷ Earnings per share
= $63 ÷ $5.25
= 12.0.

j. Return on total assets

= ((Net income + (Interest expense x (1 - Tax rate))
 Average total assets
= (($105,000 + (50,000 x (1 - 0.30))
 (($1,100,000 + $1,300,000)/2))
= $140,000  $1,200,000
= 11.67%.

k. Return on common stockholders' equity

= (Net income – Preferred dividends)
 Average common stockholders' equity
= $105,000  [($725,000 + $800,000)/2]
= 13.8%

l. Financial leverage was positive, since the rate of return to

the common stockholders (13.8%) was greater than the rate of
return on total assets (11.67%).

Managerial Accounting, 9/e 723

185. NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different
Medium versions of the same question.

Financial statements for Qiang Company appear below:

Qiang Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 170 $ 160
Accounts receivable, net ................... 130 100
Inventory .................................. 130 130
Prepaid expenses ........................... 60 70
Total current assets ..................... 490 460
Noncurrent assets:
Plant & equipment, net ..................... 1,900 1,880
Total assets ................................. $2,390 $2,340

Current liabilities:
Accounts payable ........................... $ 160 $ 160
Accrued liabilities ........................ 50 70
Notes payable, short term .................. 80 110
Total current liabilities ............... 290 340
Noncurrent liabilities:
Bonds payable .............................. 400 400
Total liabilities ........................ 690 740
Stockholders' equity:
Preferred stock, $5 par, 10% ............... 120 120
Common stock, $5 par ....................... 180 180
Additional paid-in capital--common stock ... 120 120
Retained earnings .......................... 1,280 1,180
Total stockholders' equity ............... 1,700 1,600
Total liabilities & stockholders' equity ..... $2,390 $2,340

724Managerial Accounting, 9/e

 Qiang Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,500

Cost of goods sold ....................... 1,050
Gross margin ............................. 450
Operating expenses ....................... 180
Net operating income ..................... 270
Interest expense ......................... 40
Net income before taxes .................. 230
Income taxes (30%) ....................... 69
Net income ............................... $ 161

Dividends during 19X6 totaled $61 thousand, of which $12

thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $50.

Required:

Compute the following for 19X6:

a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.

Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common
shares outstanding*
= ($161 - $12) ÷ 36
= $4.14

*Number of common
shares outstanding = Common stock ÷ Par value
= $180 ÷ $5
= 36

b. Price-earnings ratio = Market price per share

÷ Earnings per share (see above)
= $50 ÷ $4.14
= 12.1

c. Dividend yield ratio = Dividends per share*

Managerial Accounting, 9/e 725

 ÷ Market price per share
= $1.36 ÷ $50.00
= 2.72%

*Dividends per share = Common dividends ÷ Common shares**

= $49 ÷ 36
= $1.36
**See above

d. Return on total assets = Adjusted net income*

÷ Average total assets**
= $189 ÷ $2,365
= 7.99%

*Adjusted net income = Net income

+ [Interest expense x (1-Tax rate)]
= $161 + [$40 x (1 - 0.30)]
= $189

**Average total assets = ($2,390 + $2,340) ÷ 2

= $2,365

e. Return on common
stockholders' equity = (Net income – Preferred dividends)
÷ Average common stockholders' equity*
= ($161 - $12)÷$1,530
= 9.74%

*Average common stockholders' equity = ($1,580 + $1,480) ÷ 2

= $1,530

f. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $1,580 ÷ 36
= $43.89

*Number of common
shares outstanding = Common stock ÷ Par value
= $180 ÷ $5
= 36

726Managerial Accounting, 9/e

186. NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are
Medium different versions of the same question.

Financial statements for Qualle Company appear below:

Qualle Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 130 $ 120
Accounts receivable, net ................... 110 100
Inventory .................................. 170 170
Prepaid expenses ........................... 30 30
Total current assets ..................... 440 420
Noncurrent assets:
Plant & equipment, net ..................... 1,890 1,880
Total assets ................................. $2,330 $2,300

Current liabilities:
Accounts payable ........................... $ 130 $ 130
Accrued liabilities ........................ 40 50
Notes payable, short term .................. 250 290
Total current liabilities ............... 420 470
Noncurrent liabilities:
Bonds payable .............................. 470 500
Total liabilities ........................ 890 970
Stockholders' equity:
Preferred stock, $5 par, 10% ............... 100 100
Common stock, $10 par ...................... 160 160
Additional paid-in capital--common stock ... 170 170
Retained earnings .......................... 1,010 900
Total stockholders' equity ............... 1,440 1,330
Total liabilities & stockholders' equity ..... $2,330 $2,300

Managerial Accounting, 9/e 727

 Qualle Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,300

Cost of goods sold ....................... 1,610
Gross margin ............................. 690
Operating expenses ....................... 270
Net operating income ..................... 420
Interest expense ......................... 50
Net income before taxes .................. 370
Income taxes (30%) ....................... 111
Net income ............................... $ 259

Dividends during 19X6 totaled $149 thousand, of which $10

thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $280.

Required:

Compute the following for 19X6:

a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.

Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares
outstanding*
= ($259 - $10) ÷ 16
= $15.56

*Number of common
shares outstanding = Common stock ÷ Par value
= $160 ÷ $10
= 16

b. Price-earnings ratio = Market price per share

÷ Earnings per share (see above)
= $280 ÷ $15.56
= 18.0

c. Dividend yield ratio = Dividends per share*

728Managerial Accounting, 9/e

 ÷ Market price per share
= $8.69 ÷ $280.00
= 3.10%

*Dividends per share = Common dividends ÷ Common shares**

= $139 ÷ 16
= $8.69
**See above

d. Return on total assets = Adjusted net income*

÷ Average total assets**
= $294 ÷ $2,315
= 12.70%

*Adjusted net income = Net income + [Interest expense

x (1-Tax rate)]
= $259 + [$50 x (1 - 0.30)]
= $294

**Average total assets = ($2,330 + $2,300) ÷ 2

= $2,315

e. Return on common
stockholders' equity = (Net income – Preferred dividends)
÷ Average common
stockholders' equity*
= ($259 - $10)÷$1,285
= 19.38%

*Average common stockholders' equity = ($1,340 + $1,230) ÷ 2

= $1,285

f. Book value per share = Common stockholders' equity

÷ Number of common
shares outstanding*
= $1,340 ÷ 16
= $83.75

*Number of common
shares outstanding = Common stock ÷ Par value
= $160 ÷ $10
= 16

Managerial Accounting, 9/e 729

187. NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are
Medium different versions of the same question.

Financial statements for Quade Company appear below:

Quade Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............. $ 110 $ 110
Accounts receivable, net ................... 150 140
Inventory .................................. 120 140
Prepaid expenses ........................... 80 80
Total current assets ..................... 460 470
Noncurrent assets:
Plant & equipment, net ..................... 1,550 1,520
Total assets ................................. $2,010 $1,990

Current liabilities:
Accounts payable ........................... $ 130 $ 130
Accrued liabilities ........................ 20 40
Notes payable, short term .................. 260 270
Total current liabilities ............... 410 440
Noncurrent liabilities:
Bonds payable .............................. 380 400
Total liabilities ........................ 790 840
Stockholders' equity:
Preferred stock, $5 par, 15% ............... 120 120
Common stock, $10 par ...................... 160 160
Additional paid-in capital--common stock ... 280 280
Retained earnings .......................... 660 590
Total stockholders' equity ............... 1,220 1,150
Total liabilities & stockholders' equity ..... $2,010 $1,990

730Managerial Accounting, 9/e

 Quade Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $2,400

Cost of goods sold ....................... 1,680
Gross margin ............................. 720
Operating expenses ....................... 280
Net operating income ..................... 440
Interest expense ......................... 40
Net income before taxes .................. 400
Income taxes (30%) ....................... 120
Net income ............................... $ 280

Dividends during 19X6 totaled $210 thousand, of which $18

thousand were preferred dividends.
The market price of a share of common stock on December 31,
19X6 was $230.

Required:

Compute the following for 19X6:

a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.

Answer:
a. Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common
shares outstanding*
= ($280 - $18) ÷ 16
= $16.38

*Number of common
shares outstanding = Common stock ÷ Par value
= $160 ÷ $10
= 16

b. Price-earnings ratio = Market price per share

÷ Earnings per share (see above)
= $230 ÷ $16.38
= 14.0

Managerial Accounting, 9/e 731

 c. Dividend yield ratio = Dividends per share*
÷ Market price per share
= $12.00 ÷ $230.00
= 5.22%

*Dividends per share = Common dividends ÷ Common shares**

= $192 ÷ 16
= $12.00
**See above

d. Return on total assets = Adjusted net income*

÷ Average total assets**
= $308 ÷ $2,000
= 15.40%

*Adjusted net income = Net income + [Interest expense

x (1-Tax rate)]
= $280 + [$40 x (1 – 0.30)]
= $308

**Average total assets = ($2,010 + $1,990) ÷ 2

= $2,000

e. Return on common
stockholders' equity = (Net income – Preferred dividends)
÷ Average common stockholders' equity*
= ($280 - $18)÷$1,065
= 24.60%

*Average common stockholders' equity = ($1,100 + $1,030) ÷ 2

= $1,065

f. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $1,100 ÷ 16
= $68.75

*Number of common
shares outstanding = Common stock ÷ Par value
= $160 ÷ $10
= 16

732Managerial Accounting, 9/e

188. Condensed financial statements of Miller Company at the
Medium beginning and at the end of the current year are given below:

Miller Company
Balance Sheet

End of Beginning of
Current Year Current Year
Cash ........................... $ 10,000 $ 8,000
Marketable securities .......... 20,000 22,000
Accounts receivable ............ 90,000 110,000
Inventories .................... 150,000 100,000
Plant and equipment, net ....... 280,000 260,000
Total assets ................ $550,000 $500,000

Accounts payable ............... $ 80,000 $ 60,000

Accrued short-term liabilities 20,000 25,000
Bonds payable .................. 75,000 75,000
Preferred stock, 10%, $100 par 50,000 50,000
Common stock, $10 par .......... 100,000 100,000
Additional paid-in capital,
common stock ................. 50,000 50,000
Retained earnings .............. 175,000 140,000
Total liabilities and equity $550,000 $500,000

Miller Company
Condensed Income Statement
For the Current Year

Sales (all on account) ............ $650,000

Less cost of goods sold ........... 350,000
Gross margin ...................... 300,000
Less operating expenses ........... 200,000
Net operating income .............. 100,000
Less interest expense ............. 10,000
Net income before income taxes .... 90,000
Less income taxes ................. 40,000
Net income ........................ $ 50,000

The company paid total dividends of $15,000 during the year, of

which $5,000 were to preferred stockholders. The market price
of a share of common stock at the end of the year was $30.

Managerial Accounting, 9/e 733

 Required:

On the basis of the information given above, fill in the blanks

with the appropriate figures.

Example: The current ratio at the end of the current year would
be computed by dividing $270,000 by $100,000

a. The acid-test (quick) ratio at the end of the current year

would be computed by dividing _______________ by
_________________.

b. The inventory turnover for the year would be computed by

dividing _______________ by _________________.

c. The debt-to-equity ratio at the end of the current year

would be computed by dividing _______________ by
_________________.

d. The earnings per share of common stock would be computed by

dividing _______________ by _________________.

e. The accounts receivable turnover for the year would be

computed by dividing _______________ by _________________.

f. The times interest earned for the year would be computed by

dividing _______________ by _________________.

g. The return on common stockholders' equity for the year would

be computed by dividing _______________ by
_________________.

h. The dividend yield would be computed by dividing

_______________ by _________________.

Answer:
a. $120,000; $100,000
b. $350,000; $125,000
c. $175,000; $375,000
d. $ 45,000; 10,000 shares
e. $650,000; $100,000
f. $100,000; $ 10,000
g. $ 45,000; $307,500
h. $1; $30

734Managerial Accounting, 9/e

189. Shelzo Inc., a manufacturer of construction equipment is
Hard considering the purchase of one of its suppliers, Raritron
CMA Industries. The purchase has been given preliminary approval by
adapted Shelzo's Board of Directors, and several discussions have taken
place between the management of both companies. Raritron has
submitted financial data for the past several years. Shelzo's
controller has analyzed Raritron's financial statements and
prepared the following ratio analysis comparing Raritron's
performance with the industry averages.

Industry
1993 1992 1991 Average
Return on common
stockholders’ equity ......... 13.03 13.02 12.98 12.96
Average sale period ............ 51.16 47.29 42.15 38.63
Times interest earned .......... 3.87 3.46 3.28 3.56
Price-earnings ratio ........... 10.96 11.23 11.39 11.54
Debt-to-equity ratio ........... 0.50 0.46 0.48 0.57
Accounts receivable turnover ... 6.98 7.25 7.83 7.78
Current ratio .................. 1.65 1.95 1.70 2.30
Dividend yield ratio ........... 2.08 2.06 2.12 2.25

Required:

Using the information provided above for Raritron Industries:

A. 1. Identify the two ratios from the above list that would
be of most interest to short-term creditors.
2. Explain what these two ratios measure.
3. What do these two ratios indicate about Shelzo Inc.?

B. 1. Identify the three ratios from the above list that would
be of most interest to stockholders.
2. Explain what these three ratios measure.
3. What do these three ratios indicate about Shelzo Inc.?

C. 1. Identify the two ratios from the above list that would
be of most interest to long-term creditors.
2. Explain what these two ratios measure.
3. What do these two ratios indicate about Shelzo Inc.?

Answer:
A. 1. Two ratios that would be of most interest to short-term
creditors would be the average sale period and the
current ratio.
2. The average sale period relates the average amount of
inventory to the cost of goods sold. This ratio measures
the length of time it takes on average to sell inventory
and is a gauge of how well the company manages its
inventory. The current ratio is calculated by dividing
current assets by current liabilities. This ratio
measures short-run solvency, i.e., the ability to meet
current obligations.

Managerial Accounting, 9/e 735

 3. For Shelzo Inc., the average sale period has been
increasing and is well above the industry average, while
the current ratio has been below the industry average.
Both of these ratios indicate that there may be problems
with the company’s liquidity position. This could be
caused by poor inventory control.

B. 1. The three ratios that would be of most interest to common

stockholders are the return on common stockholders’
equity, the price-earnings ratio, and the dividend yield
ratio.
2. The return on common stockholders’ equity is a measure of
how effectively the company has used the stockholders’
investment in the company to generate profits. The price-
earnings ratio provides a measure of how the stock market
perceives the company’s future earnings prospects. The
higher the ratio, the more favorable the future looks for
the company. The dividend yield ratio tells us what
proportion of the company’s profits are paid out as cash
dividends to common stockholders.
3. These three ratios are close to the industry averages and
there are no discernible significant trends.

C. 1. The two ratios that would be of most interest to long-

term creditors are times interest earned and the debt-to-
equity ratio.
2. Times interest earned is earnings before interest expense
and taxes divided by interest expense. This ratio
measures debt paying ability. If stable, the company will
be able to refinance or obtain new funds at reasonable
rates. The debt-to-equity ratio measures the relative
proportions of debt and equity in the company’s capital
structure. The lower the level of the debt-to-equity
ratio, the more security long-term debtors have.
3. For Shelzo Inc., times interest earned has been improving
and is currently above the industry average, indicating
that the company should be able to borrow additional
funds if needed. The company’s debt-to-equity ratio is
below the industry average which also indicates the
company has the capacity to perhaps take on additional
debt.

736Managerial Accounting, 9/e

190. Financial statements for Lowe Company appear below:
Medium
Lowe Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Cash........................................ $ 45 $ 30
Accounts receivable, net ................... 38 40
Inventory .................................. 67 60
Long-term investments....................... 162 150
Land........................................ 128 100
Building.................................... 98 50
Total assets.............................. $ 538 $ 430

Accounts payable ........................... $ 36 $ 40

Notes payable, short term .................. 24 30
Bonds payable............................... 35 50
Mortgage payable............................ 100 -0-
Preferred stock,12%......................... 100 100
Common stock................................ 195 170
Retained earnings .......................... 48 40
Total liabilities & stockholders' equity.. $ 538 $ 430

Lowe Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) ................... $145

Cost of goods sold ....................... 74
Gross margin ............................. $ 71
Operating expenses (including interest
expense of $5,000)...................... 16
Net income before taxes .................. 55
Income taxes (40%) ....................... 22
Net income ............................... $ 33

Dividends totaled $25,000 for the year, of which $12,000 was paid
to the preferred stockholder.

Required:

Compute the following for Year 2:

a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Return on total assets.
f. Debt-to-equity ratio.
g. Times-interest-earned ratio.

Managerial Accounting, 9/e 737

 Answer:

a. Current ratio = Current assets ÷ Current liabilities

= ($45 + $38 + $67) ÷ ($36 + $24)
= 2.5 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $83 ÷ ($36 + $24)
= 1.38 to 1

*Quick assets = Cash + Current receivables

= $45 + $38
= $83

c. Accounts receivable
turnover = Sales on account ÷ Average accounts receivable*
= $145 ÷ $39
= 3.72 times

*Average accounts receivable = ($38 + $40) ÷ 2

= $39

Average collection
period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 3.72
= 98.1 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $74 ÷ $63.5
= 1.17 times

*Average inventory = ($67 + $60) ÷ 2

= $63.5

e. Return on total assets

= ((Net income + (Interest expense x (1 - tax rate))
 Average total assets
= (($33 + ($5 x (1 - 0.40))  (($538 + $430)/2))
= $36  $484
= 7.4%.

f. Times interest earned = Earnings before interest and taxes

÷ Interest expense
= ($55 + $5) ÷ $5
= 12.00 times

g. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= ($36 + $24 + $35 + $100) ÷ ($100 + $195 + $48)
= $195 ÷ $343
= 0.57 to 1

738Managerial Accounting, 9/e

191. Several investors are in the process of organizing a new
Medium company. The investors feel that $800,000 would be adequate to
finance the new company's operations. Three methods are
available to finance the new company:

a. All $800,000 could be obtained through the issuance of

common stock.

b. Common stock could be issued to provide $400,000 with the

other $400,000 obtained by issuing $100 par value, l0%
preferred stock.

c. Common stock could be issued to provide $40,000 with the

other $400,000 obtained by issuing bonds with an interest
rate of 10%.

The investors are confident that the company could earn

$175,000 each year before interest and taxes. The tax rate is
40%.

Required:

a. Assuming that the estimates are correct, compute the net

income available to common stockholders under each of the
three financing methods proposed above.
b. Using the income data computed in (a) above, compute the
return on common stockholders’ equity under each of the
three methods.
c. Why do methods B and C provided a greater return on common
equity than does method A? Why does method C provide a
greater return on common equity than method B?

Answer:

a. Net income available to common stockholders:

Method A Method B Method C

Income before interest and taxes... $175,000 $175,000 $175,000
Deduct interest expense:
0.10 x $400,000.................. ________ ________ 40,000
Income before taxes................ $175,000 $175,000 $135,000
Deduct income taxes (40%).......... 70,000 70,000 54,000
Net income......................... $105,000 $105,000 $ 81,000
Deduct preferred dividends:
0.10 x $400,000................... - o 40,000 - o
Net income to common stockholders.. $105,000 $ 65,000 $ 81,000

Managerial Accounting, 9/e 739

 b. Return on common equity:
Method A Method B Method C
Net income to common stockholders $105,000 $ 65,000 $ 81,000
Common stockholders' investment... $800,000 $400,000 $400,000
Return on common equity........... 13.10% 16.25% 20.25%

c. Methods B and C provide a greater return on common equity

than Method A due to the effect of positive leverage.
Methods B and C each contain sources of funds that require a
fixed annual return on the funds provided. This fixed annual
return is less than what is being earned on the assets of
the company, with the difference going to common
stockholders.

Method C uses debt and provides more leverage than Method B

in which preferred stock is issued. The difference is due to
the deductibility for tax purposes of the interest on debt,
whereas dividends on preferred stock are not deductible for
tax purposes.

740Managerial Accounting, 9/e

192. NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different
Medium versions of the same question.

Financial statements for Raridan Company appear below:

Raridan Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............ $ 140 $ 140
Accounts receivable, net .................. 190 170
Inventory ................................. 100 110
Prepaid expenses .......................... 70 70
Total current assets .................... 500 490
Noncurrent assets:
Plant & equipment, net .................... 1,540 1,520
Total assets ................................ $2,040 $2,010

Current liabilities:
Accounts payable .......................... $ 110 $ 110
Accrued liabilities ....................... 50 40
Notes payable, short term ................. 110 110
Total current liabilities .............. 270 260
Noncurrent liabilities:
Bonds payable ............................. 280 300
Total liabilities ....................... 550 560
Stockholders' equity:
Preferred stock, $10 par, 5% .............. 120 120
Common stock, $10 par ..................... 200 200
Additional paid-in capital--common stock .. 260 260
Retained earnings ......................... 910 870
Total stockholders' equity .............. 1,490 1,450
Total liabilities & stockholders' equity .... $2,040 $2,010

Raridan Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,900

Cost of goods sold ....................... 1,330
Gross margin ............................. 570
Operating expenses ....................... 220
Net operating income ..................... 350
Interest expense ......................... 30
Net income before taxes .................. 320
Income taxes (30%) ....................... 96
Net income ............................... $ 224

Managerial Accounting, 9/e 741

 Required:

Compute the following for 19X6:

a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.

Answer:
a. Current ratio = Current assets ÷ Current liabilities
= $500 ÷ $270
= 1.85 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $330 ÷ $270
= 1.22 to 1

*Quick assets = Cash + Marketable securities

+ Current receivables
= $140 + $190
= $330

c. Accounts receivable
turnover = Sales on account ÷ Average accounts receivable*
= $1,900 ÷ $180
= 10.56 times

*Average accounts receivable = ($190 + $170) ÷ 2

= $180

Average collection
period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 10.56
= 34.6 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $1,330 ÷ $105
= 12.67 times

*Average inventory = ($100 + $110) ÷ 2

= $105

e. Times interest earned = Net operating income

÷ Interest expense
= $350 ÷ $30
= 11.67 times

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $550 ÷ $1,490
= 0.37 to 1

742Managerial Accounting, 9/e

193. NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different
Medium versions of the same question.

Financial statements for Rarig Company appear below:

Rarig Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............ $ 210 $ 190
Accounts receivable, net .................. 160 150
Inventory ................................. 190 180
Prepaid expenses .......................... 30 30
Total current assets .................... 590 550
Noncurrent assets:
Plant & equipment, net .................... 1,500 1,470
Total assets ................................ $2,090 $2,020

Current liabilities:
Accounts payable .......................... $ 170 $ 190
Accrued liabilities ....................... 60 60
Notes payable, short term ................. 80 120
Total current liabilities .............. 310 370
Noncurrent liabilities:
Bonds payable ............................. 460 500
Total liabilities ....................... 770 870
Stockholders' equity:
Preferred stock, $5 par, 15% .............. 100 100
Common stock, $5 par ...................... 160 160
Additional paid-in capital—common stock .. 110 110
Retained earnings ......................... 950 780
Total stockholders' equity .............. 1,320 1,150
Total liabilities & stockholders' equity .... $2,090 $2,020

Rarig Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,800

Cost of goods sold ....................... 1,260
Gross margin ............................. 540
Operating expenses ....................... 210
Net operating income ..................... 330
Interest expense ......................... 50
Net income before taxes .................. 280
Income taxes (30%) ....................... 84
Net income ............................... $ 196

Managerial Accounting, 9/e 743

 Required:

Compute the following for 19X6:

a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.

Answer:
a. Current ratio = Current assets ÷ Current liabilities
= $590 ÷ $310
= 1.90 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $370 ÷ $310
= 1.19 to 1

*Quick assets = Cash + Marketable securities

+ Current receivables
= $210 + $160
= $370

c. Accounts receivable
turnover = Sales on account ÷ Average accounts receivable*
= $1,800 ÷ $155
= 11.61 times

*Average accounts receivable = ($160 + $150) ÷ 2

= $155

Average collection
period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 11.61
= 31.4 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $1,260 ÷ $185
= 6.81 times

*Average inventory = ($190 + $180) ÷ 2

= $185

e. Times interest earned = Net operating income

÷ Interest expense
= $330 ÷ $50
= 6.60 times

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $770 ÷ $1,320
= 0.58 to 1

744Managerial Accounting, 9/e

194. NOTE TO THE INSTRUCTOR: Questions 192, 193, and 194 are different
Medium versions of the same question.

Financial statements for Rarity Company appear below:

Rarity Company
Statement of Financial Position
December 31, 19X6 and 19X5
(dollars in thousands)

19X6 19X5
Current assets:
Cash and marketable securities ............ $ 210 $ 180
Accounts receivable, net .................. 130 120
Inventory ................................. 90 110
Prepaid expenses .......................... 70 70
Total current assets .................... 500 480
Noncurrent assets:
Plant & equipment, net .................... 1,440 1,400
Total assets ................................ $1,940 $1,880

Current liabilities:
Accounts payable .......................... $ 180 $ 170
Accrued liabilities ....................... 60 80
Notes payable, short term ................. 240 240
Total current liabilities .............. 480 490
Noncurrent liabilities:
Bonds payable ............................. 480 500
Total liabilities ....................... 960 990
Stockholders' equity:
Preferred stock, $10 par, 5% .............. 100 100
Common stock, $5 par ...................... 220 220
Additional paid-in capital--common stock .. 200 200
Retained earnings ......................... 460 370
Total stockholders' equity .............. 980 890
Total liabilities & stockholders' equity .... $1,940 $1,880

Rarity Company
Income Statement
For the Year Ended December 31, 19X6
(dollars in thousands)

Sales (all on account) ................... $1,100

Cost of goods sold ....................... 770
Gross margin ............................. 330
Operating expenses ....................... 130
Net operating income ..................... 200
Interest expense ......................... 50
Net income before taxes .................. 150
Income taxes (30%) ....................... 45
Net income ............................... $ 105

Managerial Accounting, 9/e 745

 Required:

Compute the following for 19X6:

a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period (age of receivables).
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.

Answer:
a. Current ratio = Current assets ÷ Current liabilities
= $500 ÷ $480
= 1.04 to 1

b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $340 ÷ $480
= 0.71 to 1

*Quick assets = Cash + Marketable securities +

+ Current receivables
= $210 + $130
= $340

c. Accounts receivable
turnover = Sales on account ÷ Average accounts receivable*
= $1,100 ÷ $125
= 8.80 times

*Average accounts receivable = ($130 + $120) ÷ 2

= $125

Average collection
period = 365 days ÷ Accounts receivable turnover
= 365 ÷ 8.80
= 41.5 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $770 ÷ $100
= 7.70 times

*Average inventory = ($90 + $110) ÷ 2

= $100

e. Times interest earned = Net operating income

÷ Interest expense
= $200 ÷ $50
= 4.00 times

f. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $960 ÷ $980
= 0.98 to 1

746Managerial Accounting, 9/e