Chapter 13

Financial Statement Analysis

True / False Questions

1. Horizontal analysis involves comparing two or more years' financial data

for a single company.

True False

2. The gross margin percentage is computed by dividing the gross margin by

sales.

True False

3. If a company's return on assets is substantially higher than its cost of

borrowing, then the common stockholders would normally want the
company to have a relatively high debt/equity ratio.

True False

4. Dividing the market price of a share of stock by the dividends per share
gives the price-earnings ratio.

True False

5. The dividend yield ratio is calculated by dividing dividends per share by

earnings per share.

True False

6. Financial leverage is positive if the interest rate on debt is lower than the
return on total assets.

True False
7. Issuing common stock will increase a company's financial leverage.

True False

8. If the assets in which borrowed funds are invested are able to earn a rate
of return greater than the interest rate required by the lender, then
financial leverage is positive.

True False

9. One would expect the book value of a share of stock to be about the same
as the stock's market value.

True False

10 The acid-test ratio is always smaller than the current ratio.

.
True False

11 All debt is considered in the computation of the acid-test ratio.

.
True False

12 When computing the acid-test ratio, a short-term note receivable would

. be included in the numerator.

True False

13 The purchase of marketable securities for cash will lower a firm's acid-test
. ratio.

True False

14 As the inventory turnover increases, the number of days required to sell

. the inventory one time also increases.

True False

15 Negative working capital indicates that the sum of all current assets is
. negative.

True False
Multiple Choice Questions

16 The formula for the gross margin percentage is:

.

A. (Sales - Cost of goods sold)/Cost of goods

sold
B. (Sales - Cost of goods
sold)/Sales
C. Net
income/Sales
D. Net income/Cost of goods
sold

17 The gross margin percentage is most likely to be used to assess:

.

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 The market price of XYZ Company's common stock dropped from $25 to
. $21 per share. The dividend paid per share remained unchanged. The
company's dividend payout ratio would:

A. increas
e.
B. decreas
e.
C. be
unchanged.
D. impossible to determine without more
information.
19 A drop in the market price of a firm's common stock will immediately
. affect its:

A. return on common stockholders'

equity.
B. current
ratio.
C. dividend payout
ratio.
D. dividend yield
ratio.

20 Financial leverage is negative when:

.

A. the return on total assets is less than the rate of return 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.

21 Which of the following is not a potential source of financial leverage?

.

A. Long-term
debt.
B. Common
stock.
C. Accounts
payable.
D. Interest
payable.
22 Issuing new shares of stock in a five-for-one split of common stock would:
.

A. decrease the book value per share of common

stock.
B. increase the book value per share of common
stock.
C. increase total stockholders'
equity.
D. decrease total stockholders'
equity.

23 A company's current ratio and acid-test ratios are both greater than 1.
. Issuing bonds to finance purchase of an office building with the first
installment of the bonds due in the current year would:

A. decrease net working

capital.
B. decrease the current
ratio.
C. decrease the acid-test
ratio.
D. affect all of the above as
indicated.
24 What is the effect of a purchase of inventory on account on the current
. ratio and on working capital, respectively? (Assume a current ratio greater
than one prior to this transaction.)

A. Option
A
B. Option
B
C. Option
C
D. Option
D

25 At the beginning of the year, a company's current ratio is 2.2. At the end
. of the year, the company has a current ratio of 2.5. Which of the following
could help explain the change in the current ratio?

A. An increase in
inventories.
B. An increase in accounts
payable.
C. An increase in property, plant, and
equipment.
D. An increase in bonds
payable.
26 A company's current ratio and acid-test ratios are both greater than 1.
. The collection of a current accounts receivable of $29,000 would:

A. increase the current

ratio.
B. decrease the current
ratio.
C. not affect the current ratio or the acid-
test ratio.
D. decrease the acid-test
ratio.

27 Assume a company has a current ratio that is greater than 1. Which of the
. following transactions will reduce the company's current ratio?

A. Selling office equipment at book

value.
B. Paying a cash dividend already
declared.
C. Borrowing by taking out a short-term
loan.
D. Selling equipment at a
loss.

28 Higgins Company presently has a current ratio of 0.6. It is currently

. negotiating a loan, but it has been informed it must improve its current
ratio before the loan will be approved. Which of the following actions
would improve its current ratio?

A. Pay off a portion of its long-term

debt.
B. Use cash to pay off some current
liabilities.
C. Purchase additional inventory on
credit.
D. Collect some of the current accounts
receivable.
29 The ratio of cash, trade receivables, and marketable securities to current
. liabilities is:

A. the working capital of a

company.
B. the acid-test
ratio.
C. the current
ratio.
D. the debt to equity
ratio.

30 Wolbers Company has an acid-test ratio of 1.4. Which of the following

. events will cause this ratio to decrease?

A. Selling merchandise on
account.
B. Paying a cash dividend already
declared.
C. Borrowing using a short-term
note.
D. Selling equipment at a
loss.

31 Park Company purchased $100,000 in inventory from its suppliers, on

. account. The company's acid-test ratio would:

A. increas
e.
B. decreas
e.
C. remain
unchanged.
D. be impossible to determine from the given
information.
32 Assuming stable business conditions, an increase in the accounts
. receivable turnover ratio could be explained by:

A. stricter policies with respect to the granting of credit to

customers.
B. an easing of policies with respect to the granting of credit to
customers.
C. a slowdown in collecting accounts receivables from
customers.
D. none of
these.

33 Ozols Corporation's most recent income statement appears below:

.

The gross margin percentage is closest to:

A. 33.2
%
B. 55.7
%
C. 300.8
%
D. 125.6
%
34 Crandler Company's net income last year was $60,000. The company paid
. preferred dividends of $20,000 and its average common stockholders'
equity was $500,000. The company's return on common stockholders'
equity for the year was closest to:

A. 16.0
%
B. 4.0
%
C. 8.0
%
D. 12.0
%

35 The average stockholders' equity for Horn Co. last year was $2,000,000.
. Included in this figure was $200,000 of preferred stock. Preferred
dividends were $16,000. If the return on common stockholders' equity
was 12.5% for the year, net income was:

A. $225,00
0
B. $250,00
0
C. $241,00
0
D. $234,00
0
36 Artist Company's net income last year was $500,000. The company has
. 150,000 shares of common stock and 40,000 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 $1.70 per share on the common stock and $0.70
per share on the preferred stock. The earnings per share of common stock
is closest to:

A. $3.1
5
B. $3.5
2
C. $1.6
3
D. $3.3
3

37 Archer Company had net income of $40,000 last year. The company has
. 5,000 shares of common stock and 2,500 shares of preferred stock
outstanding. There was no change in the number of common or preferred
shares outstanding during the year. Preferred dividends were $2 per
share. The earnings per share of common stock was:

A. $7.0
0
B. $8.0
0
C. $5.3
3
D. $7.5
0
38 The following data have been taken from your company's financial
. records for the current year:

The price-earnings ratio is:

A. 12.
5
B. 6.
0
C. 8.
0
D. 7.
5
39 The following data have been taken from your company's financial
. records for the current year:

The price-earnings ratio is:

A. 7.
5
B. 10.
0
C. 9.
4
D. 13.
3
40 Data concerning Bouerneuf Company's common stock follow:
.

The price-earnings ratio would be:

A. 2.0
0
B. 2.6
7
C. 3.0
0
D. 4.0
0

41 Boggs Company has 40,000 shares of common stock outstanding. The

. book value per share of this stock was $60.00 and the market value per
share was $75.00 at the end of the year. Net income for the year was
$400,000. Interest on long term debt was $40,000. Dividends paid to
common stockholders were $3.00 per share. The tax rate was 30%. The
company's price-earnings ratio at the end of the year was:

A. 2
5
B. 2
0
C. 7.5
0
D. 6.0
0
42 Last year the return on total assets in Jeffrey Company was 8.5%. The
. total assets were 2.9 million at the beginning of the year and 3.1 million
at the end of the year. The tax rate was 30%, interest expense totaled
$110 thousand, and sales were $5.2 million. Net income for the year was:

A. $145,00
0
B. $222,00
0
C. $332,00
0
D. $178,00
0

43 Brandon Company's net income last year was $65,000 and its interest
. expense was $20,000. Total assets at the beginning of the year were
$640,000 and total assets at the end of the year were $690,000. The
company's income tax rate was 30%. The company's return on total
assets for the year was closest to:

A. 9.8
%
B. 10.7
%
C. 12.8
%
D. 11.9
%
44 The following account balances have been provided for the end of the
. most recent year:

The book value per share of common stock is:

A. $2
2
B. $2
5
C. $2
0
D. $2
8

45 Vessels Corporation's net income for the most recent year was
. $2,532,000. A total of 200,000 shares of common stock and 200,000
shares of preferred stock were outstanding throughout the year.
Dividends on common stock were $3.80 per share and dividends on
preferred stock were $1.25 per share. The earnings per share of common
stock is closest to:

A. $12.6
6
B. $8.8
6
C. $7.6
1
D. $11.4
1
46 Tronnes Corporation's net income last year was $1,750,000. The dividend
. on common stock was $2.60 per share and the dividend on preferred
stock was $2.50 per share. The market price of common stock at the end
of the year was $57.70 per share. Throughout the year, 300,000 shares of
common stock and 100,000 shares of preferred stock were outstanding.
The price-earnings ratio is closest to:

A. 17.8
5
B. 11.5
4
C. 24.0
4
D. 9.8
9

47 Delatrinidad Corporation's net income last year was $7,736,000. The

. dividend on common stock was $12.60 per share and the dividend on
preferred stock was $2.80 per share. The market price of common stock
at the end of the year was $53.30 per share. Throughout the year,
400,000 shares of common stock and 200,000 shares of preferred stock
were outstanding. The dividend payout ratio is closest to:

A. 0.7
0
B. 0.6
5
C. 2.3
6
D. 1.8
7
48 Last year, Shadow Corporation's dividend on common stock was $9.90
. per share and the dividend on preferred stock was $1.00 per share. The
market price of common stock at the end of the year was $68.10 per
share. The dividend yield ratio is closest to:

A. 0.1
5
B. 0.1
6
C. 0.9
1
D. 0.0
1
49 Hagerman Corporation's most recent income statement appears below:
.

The beginning balance of total assets was $140,000 and the ending
balance was $90,000. The return on total assets is closest to:

A. 18.3
%
B. 24.3
%
C. 34.8
%
D. 26.1
%
50 Excerpts from Lasso Corporation's most recent balance sheet appear
. below:

Net income for Year 2 was $145,000. Dividends on common stock were
$55,000 in total and dividends on preferred stock were $20,000 in total.
The return on common stockholders' equity for Year 2 is closest to:

A. 12.3
%
B. 8.1
%
C. 13.0
%
D. 14.3
%
51 Data from Saldivar Corporation's most recent balance sheet appear
. below:

A total of 150,000 shares of common stock and 40,000 shares of preferred

stock were outstanding at the end of the year. The book value per share is
closest to:

A. $2.7
3
B. $5.0
0
C. $6.5
3
D. $7.8
7

52 Drama Company's working capital is $16,000 and its current liabilities are
. $94,000. The company's current ratio is closest to:

A. 1.1
7
B. 0.1
7
C. 6.8
8
D. 0.8
3
53 Selected year-end data for the Brayer Company are presented below:
.

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. 1.2
0
B. 2.4
0
C. 1.6
7
D. 2.3
3

54 Brewster Company has an acid-test ratio of 1.5 and a current ratio of 2.5.
. Current assets equal $200,000, of which $10,000 is prepaid expenses.
The company's current assets consist of cash, marketable securities,
accounts receivable, prepaid expenses, and inventory. Brewster
Company's inventory must be:

A. $30,00
0
B. $110,00
0
C. $70,00
0
D. $80,00
0
55 Cotuit Company has a current ratio of 3.2 and an acid-test ratio of 2.4.
. The company's current assets consist of cash, marketable securities,
accounts receivable, and inventory. The company's inventory is $40,000.
Cotuit Company's current liabilities must be:

A. $40,00
0
B. $120,00
0
C. $50,00
0
D. $32,00
0

56 Erastic Company has $14,000 in cash, $8,000 in marketable securities,

. $34,000 in account receivable, $40,000 in inventories, and $42,000 in
current liabilities. The company's current assets consist of cash,
marketable securities, accounts receivable, and inventory. The company's
acid-test ratio is closest to:

A. 1.3
3
B. 0.8
1
C. 2.2
9
D. 1.1
4
57 Fraser 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 $14,000. The company's accounts
receivable turnover was closest to:

A. 5.4
2
B. 13.0
0
C. 9.2
9
D. 10.8
3

58 Grasse Company had $160,000 in sales on account last year. The

. beginning accounts receivable balance was $10,000 and the ending
accounts receivable balance was $12,000. The company's average
collection period was closest to:

A. 25.09
days
B. 22.81
days
C. 50.19
days
D. 27.38
days
59 Harbor Company, a retailer, had cost of goods sold of $170,000 last year.
. The beginning inventory balance was $20,000 and the ending inventory
balance was $24,000. The company's inventory turnover was closest to:

A. 7.0
8
B. 7.7
3
C. 3.8
6
D. 8.5
0

60 Irastan Company, a retailer, had cost of goods sold of $250,000 last year.
. The beginning inventory balance was $28,000 and the ending inventory
balance was $20,000. The company's average sale period was closest to:

A. 40.88
days
B. 29.20
days
C. 35.03
days
D. 70.08
days
61 Deschambault Corporation's total current assets are $260,000, its
. noncurrent assets are $700,000, its total current liabilities are $130,000,
its long-term liabilities are $510,000, and its stockholders' equity is
$320,000. Working capital is:

A. $260,00
0
B. $320,00
0
C. $190,00
0
D. $130,00
0

62 Ladabouche Corporation's total current assets are $390,000, its

. noncurrent assets are $630,000, its total current liabilities are $330,000,
its long-term liabilities are $420,000, and its stockholders' equity is
$270,000. The current ratio is closest to:

A. 0.8
5
B. 0.7
9
C. 1.1
8
D. 0.6
2
63 Data from Adamis Corporation's most recent balance sheet appear below:
.

The company's acid-test ratio is closest to:

A. 0.3
3
B. 0.7
1
C. 0.8
1
D. 0.1
0
64 Bonine Corporation has provided the following data:
.

The accounts receivable turnover for this year is closest to:

A. 0.8
3
B. 8.9
4
C. 9.8
5
D. 1.2
0
65 Data from Concepcion Corporation's most recent balance sheet and
. income statement appear below:

The average collection period for this year is closest to:

A. 54.3
days
B. 7.4
days
C. 7.2
days
D. 54.7
days
66 Kaelker Corporation has provided the following data:
.

The inventory turnover for this year is closest to:

A. 3.3
6
B. 0.8
7
C. 1.1
5
D. 3.1
5
67 Data from Davoren Corporation's most recent balance sheet and income
. statement appear below:

The average sale period for this year is closest to:

A. 55.7
days
B. 64.4
days
C. 112.0
days
D. 122.1
days

68 Last year Jason Company had a net income of $250,000, income tax
. expense of $78,000, and interest expense of $30,000. The company's
times interest earned was closest to:

A. 4.7
3
B. 9.3
3
C. 11.9
3
D. 8.3
3
69 Jersey Corporation has total interest expense of $10,000, sales of $1
. million, a tax rate of 40%, and net income (after taxes) of $60,000. What
is this firm's times interest earned ratio?

A. 1
6
B. 1
1
C. 1
0
D. 7

70 Krast Company has total assets of $160,000 and total liabilities of

. $70,000. The company's debt-to-equity ratio is closest to:

A. 0.5
6
B. 0.4
4
C. 0.3
0
D. 0.7
8
71 Pia Corporation has provided the following data from its most recent
. income statement:

The times interest earned ratio is closest to:

A. 2.0
9
B. 1.0
9
C. 0.7
6
D. 2.9
8
72 Damon Corporation has provided the following data from its most recent
. balance sheet:

The debt-to-equity ratio is closest to:

A. 0.1
7
B. 6.0
0
C. 0.8
6
D. 7.0
0
73 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The gross margin percentage for Year 2 is closest to:

A. 41.5
%
B. 70.9
%
C. 15.2
%
D. 658.8
%
74 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $0.4
0
B. $0.7
3
C. $0.6
1
D. $0.4
3
75 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The price-earnings ratio for Year 2 is closest to:

A. 9.6
4
B. 16.3
7
C. 11.5
4
D. 17.6
0
76 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The dividend payout ratio for Year 2 is closest to:

A. 81.3
%
B. 75.0
%
C. 70.6
%
D. 1250.0
%
77 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The dividend yield ratio for Year 2 is closest to:

A. 0.36
%
B. 92.31
%
C. 4.26
%
D. 4.62
%
78 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The return on total assets for Year 2 is closest to:

A. 7.85
%
B. 7.77
%
C. 6.51
%
D. 6.44
%
79 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 11.33
%
B. 10.00
%
C. 10.67
%
D. 9.41
%
80 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The book value per share at the end of Year 2 is closest to:

A. $6.6
0
B. $4.3
0
C. $3.8
0
D. $0.4
0
81 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The working capital at the end of Year 2 is:

A. $610
thousand
B. $860
thousand
C. $310
thousand
D. $710
thousand
82 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The current ratio at the end of Year 2 is closest to:

A. 2.0
3
B. 0.3
5
C. 0.7
5
D. 0.4
6
83 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The acid-test ratio at the end of Year 2 is closest to:

A. 2.0
3
B. 1.4
7
C. 1.6
0
D. 1.3
3
84 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The accounts receivable turnover for Year 2 is closest to:

A. 5.1
9
B. 5.4
0
C. 1.0
8
D. 0.9
2
85 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The average collection period for Year 2 is closest to:

A. 0.9
days
B. 70.3
days
C. 1.1
days
D. 67.6
days
86 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The inventory turnover for Year 2 is closest to:

A. 0.9
3
B. 1.0
8
C. 5.8
5
D. 6.0
8
87 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The average sale period for Year 2 is closest to:

A. 60.0
days
B. 35.1
days
C. 62.4
days
D. 213.6
days
88 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The times interest earned for Year 2 is closest to:

A. 3.4
0
B. 8.3
4
C. 4.8
4
D. 5.8
4
89 Hartzog Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.6
1
B. 0.2
8
C. 0.5
3
D. 0.1
9
90 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The gross margin percentage for Year 2 is closest to:

A. 82.9
%
B. 45.3
%
C. 446.2
%
D. 22.4
%
91 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $0.5
5
B. $0.9
3
C. $1.0
1
D. $0.6
5
92 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The price-earnings ratio for Year 2 is closest to:

A. 14.7
2
B. 17.4
0
C. 9.4
8
D. 10.2
9
93 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The dividend payout ratio for Year 2 is closest to:

A. 72.7
%
B. 54.5
%
C. 46.2
%
D. 1818.2
%
94 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The dividend yield ratio for Year 2 is closest to:

A. 1.05
%
B. 4.18
%
C. 75.00
%
D. 3.13
%
95 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The return on total assets for Year 2 is closest to:

A. 9.35
%
B. 10.23
%
C. 9.42
%
D. 10.16
%
96 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 12.44
%
B. 13.02
%
C. 15.38
%
D. 10.53
%
97 Hick Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The book value per share at the end of Year 2 is closest to:

A. $4.3
5
B. $5.3
5
C. $0.5
5
D. $6.9
5
98 Selected financial data from Osterville Company for the most recent year
. appear below:

The income tax rate is 40%.

Net income as a percentage of sales was:

A. 5
%
B. 3
%
C. 2.25
%
D. 1.75
%
99 Selected financial data from Osterville Company for the most recent year
. appear below:

The income tax rate is 40%.

Net operating income as a percentage of sales was:

A. 40
%
B. 30
%
C. 10
%
D. 5
%
100 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's earnings per share of common stock for Year 2 was
closest to:

A. $7.2
3
B. $2.2
7
C. $10.9
1
D. $7.6
4
101 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's dividend yield ratio on December 31, Year 2 was

closest to:

A. 3.1
%
B. 1.1
%
C. 3.5
%
D. 2.7
%
102 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's return on total assets for Year 2 was closest to:

A. 15.5
%
B. 15.9
%
C. 16.5
%
D. 14.5
%
103 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's current ratio at the end of Year 2 was closest to:

A. 1.2
4
B. 0.5
5
C. 0.4
4
D. 1.7
1
104 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's accounts receivable turnover for Year 2 was closest

to:

A. 15.
7
B. 11.
0
C. 17.
7
D. 12.
4
105 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's average sale period for Year 2 was closest to:

A. 23.2
days
B. 29.5
days
C. 33.2
days
D. 20.6
days
106 Financial statements for Orange Company appear below:
.
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's times interest earned for Year 2 was closest to:

A. 16.
0
B. 28.
3
C. 17.
0
D. 11.
2
107 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's current ratio at December 31 was closest to:

A. 1.9
5
B. 2.6
7
C. 1.3
3
D. 2.0
0
108 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's times interest earned ratio for the year was closest
to:

A. 11.
0
B. 10.
5
C. 12.
0
D. 22.
0
109 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's acid-test ratio at December 31 was closest to:

A. 0.4
5
B. 0.8
3
C. 2.0
0
D. 1.2
0
110 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's inventory turnover ratio for the year was closest to:

A. 8
B. 3
C. 5
D. 7.
5
111 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's average collection period for the year was closest
to:

A. 72
days
B. 8
days
C. 120
days
D. 46
days
112 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's price-earnings ratio at December 31 was closest to:

A. 3.0
0
B. 8.2
5
C. 8.0
0
D. 7.2
5
113 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's book value per share at December 31 was closest

to:

A. $7.0
0
B. $15.0
0
C. $24.0
0
D. $30.0
0
114 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's dividend payout ratio for the year was closest to:

A. 75
%
B. 25
%
C. 5
%
D. 3.125
%
115 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's debt-to-equity ratio at the end of the year was

closest to:

A. 0.3
3
B. 0.5
0
C. 0.6
7
D. 1.0
0
116 Financial statements for Harwich Company for the most recent year
. appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's dividend yield ratio for the year was closest to:

A. 3.125
%
B. 12.500
%
C. 9.125
%
D. 25.000
%
117 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's earnings per share of common stock for Year 2 was
closest to:

A. $18.3
9
B. $27.2
2
C. $19.0
6
D. $11.0
3
118 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's price-earnings ratio on December 31, Year 2 was

closest to:

A. 5.8
8
B. 14.5
0
C. 8.7
0
D. 8.4
0
119 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's dividend payout ratio for Year 2 was closest to:

A. 75.8
%
B. 28.5
%
C. 76.7
%
D. 47.4
%
120 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's dividend yield ratio on December 31, Year 2 was

closest to:

A. 8.7
%
B. 9.1
%
C. 8.3
%
D. 5.5
%
121 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's return on total assets for Year 2 was closest to:

A. 15.8
%
B. 17.2
%
C. 18.6
%
D. 17.8
%
122 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's return on common stockholders' equity for Year 2 was

closest to:

A. 29.8
%
B. 26.9
%
C. 30.9
%
D. 27.9
%
123 Financial statements for Larned Company appear below:
.
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's book value per share at the end of Year 2 was closest
to:

A. $16.1
1
B. $63.8
9
C. $70.5
6
D. $10.0
0
124 The following selected data are for Geneva Company:
.

Geneva Company's return on common stockholders' equity for Year 2 is

closest to:

A. 11
%
B. 12
%
C. 13
%
D. 6
%
125 The following selected data are for Geneva Company:
.

The earnings per share of common stock for Year 2 is closest to:

A. $1.6
0
B. $2.0
7
C. $3.2
7
D. $3.6
7
126 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $1.0
0
B. $1.6
0
C. $1.4
3
D. $0.9
0
127 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The price-earnings ratio for Year 2 is closest to:

A. 11.0
8
B. 12.4
0
C. 19.7
0
D. 17.7
3
128 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The dividend payout ratio for Year 2 is closest to:

A. 55.6
%
B. 44.4
%
C. 40.0
%
D. 1111.1
%
129 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The dividend yield ratio for Year 2 is closest to:

A. 2.26
%
B. 2.82
%
C. 80.00
%
D. 0.56
%
130 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The return on total assets for Year 2 is closest to:

A. 7.75
%
B. 8.67
%
C. 7.69
%
D. 8.61
%
131 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 11.43
%
B. 11.61
%
C. 10.29
%
D. 12.90
%
132 Cadarette Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The book value per share at the end of Year 2 is closest to:

A. $8.0
0
B. $0.9
0
C. $13.0
0
D. $9.0
0
133 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $0.3
5
B. $0.5
0
C. $0.3
0
D. $0.6
5
134 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The price-earnings ratio for Year 2 is closest to:

A. 8.2
2
B. 15.2
6
C. 17.8
0
D. 10.6
8
135 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The dividend payout ratio for Year 2 is closest to:

A. 50.0
%
B. 28.6
%
C. 33.3
%
D. 3333.3
%
136 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The dividend yield ratio for Year 2 is closest to:

A. 2.81
%
B. 66.67
%
C. 1.87
%
D. 0.94
%
137 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The return on total assets for Year 2 is closest to:

A. 5.74
%
B. 7.46
%
C. 7.40
%
D. 5.79
%
138 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 8.70
%
B. 10.17
%
C. 10.14
%
D. 11.86
%
139 Excerpts from Goodrow Corporation's most recent balance sheet and
. income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The book value per share at the end of Year 2 is closest to:

A. $0.3
0
B. $3.0
5
C. $6.1
0
D. $3.5
5
140 Financial statements for Marcell Company appear below:
.
Marcell Company's working capital (in thousands of dollars) at the end of
Year 2 was closest to:

A. $47
0
B. $2
0
C. $52
0
D. $1,24
0
141 Financial statements for Marcell Company appear below:
.
Marcell Company's current ratio at the end of Year 2 was closest to:

A. 1.0
4
B. 0.4
2
C. 0.4
8
D. 1.2
2
142 Financial statements for Marcell Company appear below:
.
Marcell Company's acid-test ratio at the end of Year 2 was closest to:

A. 0.3
3
B. 1.3
5
C. 0.6
0
D. 0.7
4
143 Financial statements for Marcell Company appear below:
.
Marcell Company's accounts receivable turnover for Year 2 was closest
to:

A. 16.
2
B. 9.
9
C. 23.
2
D. 14.
2
144 Financial statements for Marcell Company appear below:
.
Marcell Company's average collection period for Year 2 was closest to:

A. 22.6
days
B. 15.7
days
C. 25.8
days
D. 36.9
days
145 Financial statements for Marcell Company appear below:
.
Marcell Company's inventory turnover for Year 2 was closest to:

A. 16.
2
B. 23.
2
C. 14.
2
D. 9.
9
146 Financial statements for Marcell Company appear below:
.
Marcell Company's average sale period for Year 2 was closest to:

A. 15.7
days
B. 25.8
days
C. 36.9
days
D. 22.6
days
147 Selected financial data for Bragg Company appear below:
.

Bragg Company's inventory turnover ratio for Year 2 was closest to:

A. 2.0
0
B. 2.6
7
C. 4.8
0
D. 4.0
0
148 Selected financial data for Bragg Company appear below:
.

Suppose that 45% of Bragg Company's total sales are cash sales. The
company's average collection period (age of receivables) for Year 2 was
closest to:

A. 44.24
days
B. 54.07
days
C. 36.05
days
D. 29.49
days
149 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The working capital at the end of Year 2 is:

A. $970
thousand
B. $570
thousand
C. $280
thousand
D. $810
thousand
150 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The current ratio at the end of Year 2 is closest to:

A. 1.9
7
B. 0.7
2
C. 0.3
0
D. 0.4
1
151 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The acid-test ratio at the end of Year 2 is closest to:

A. 1.6
9
B. 1.9
7
C. 1.3
9
D. 1.5
2
152 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The accounts receivable turnover for Year 2 is closest to:

A. 1.1
4
B. 8.1
9
C. 0.8
8
D. 8.7
3
153 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The average collection period for Year 2 is closest to:

A. 1.1
days
B. 0.9
days
C. 41.8
days
D. 44.6
days
154 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The inventory turnover for Year 2 is closest to:

A. 1.2
5
B. 9.8
9
C. 11.1
3
D. 0.8
0
155 Dieringer Corporation's most recent balance sheet and income statement
. appear below:
The average sale period for Year 2 is closest to:

A. 36.9
days
B. 248.0
days
C. 22.3
days
D. 32.8
days
156 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The working capital at the end of Year 2 is:

A. $63
0
B. $81
0
C. $68
0
D. $42
0
157 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The current ratio at the end of Year 2 is closest to:

A. 0.3
8
B. 2.6
2
C. 0.5
2
D. 0.7
4
158 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The acid-test ratio at the end of Year 2 is closest to:

A. 1.8
1
B. 2.6
2
C. 1.6
9
D. 1.3
6
159 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The accounts receivable turnover for Year 2 is closest to:

A. 6.8
5
B. 0.8
7
C. 1.1
5
D. 6.3
7
160 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The average collection period for Year 2 is closest to:

A. 57.3
days
B. 53.3
days
C. 0.9
days
D. 1.2
days
161 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The inventory turnover for Year 2 is closest to:

A. 4.0
5
B. 4.3
6
C. 1.1
7
D. 0.8
6
162 Excerpts from Zorra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The average sale period for Year 2 is closest to:

A. 55.9
days
B. 90.1
days
C. 83.7
days
D. 226.5
days
163 Excerpts from Tigner Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The working capital at the end of Year 2 is:

A. $74
0
B. $79
0
C. $43
0
D. $15
0
164 Excerpts from Tigner Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The current ratio at the end of Year 2 is closest to:

A. 1.1
2
B. 1.5
4
C. 0.3
5
D. 1.0
0
165 Excerpts from Tigner Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The acid-test ratio at the end of Year 2 is closest to:

A. 1.1
8
B. 1.5
5
C. 1.0
0
D. 0.9
6
166 Excerpts from Tigner Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The accounts receivable turnover for Year 2 is closest to:

A. 7.1
0
B. 0.9
1
C. 8.7
9
D. 1.1
0
167 Excerpts from Tigner Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The inventory turnover for Year 2 is closest to:

A. 0.8
6
B. 1.1
7
C. 6.3
1
D. 6.8
3
168 Data from Kooistra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The working capital at the end of Year 2 is:

A. $99
0
B. $17
0
C. $1,01
0
D. $45
0
169 Data from Kooistra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The current ratio at the end of Year 2 is closest to:

A. 0.9
6
B. 0.3
0
C. 0.3
1
D. 1.6
1
170 Data from Kooistra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The acid-test ratio at the end of Year 2 is closest to:

A. 0.7
5
B. 1.6
1
C. 0.9
6
D. 1.0
5
171 Data from Kooistra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The average collection period for Year 2 is closest to:

A. 0.9
days
B. 38.8
days
C. 40.2
days
D. 1.1
days
172 Data from Kooistra Corporation's most recent balance sheet appear
. below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The average sale period for Year 2 is closest to:

A. 51.7
days
B. 221.3
days
C. 78.2
days
D. 85.3
days
173 Financial statements for Narita Company appear below:
.
Narita Company's times interest earned for Year 2 was closest to:

A. 14.
7
B. 26.
0
C. 10.
3
D. 15.
7
174 Financial statements for Narita Company appear below:
.
Narita Company's debt-to-equity ratio at the end of Year 2 was closest
to:

A. 0.1
7
B. 0.5
8
C. 0.2
5
D. 0.4
2
175 Mclaughlin Corporation's most recent balance sheet and income
. statement appear below:
The times interest earned for Year 2 is closest to:

A. 2.7
3
B. 4.9
1
C. 7.0
1
D. 3.9
1
176 Mclaughlin Corporation's most recent balance sheet and income
. statement appear below:
The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.6
9
B. 0.4
0
C. 0.3
5
D. 0.9
3
177 Data from Kempen Corporation's most recent balance sheet and the
. company's income statement appear below:

The times interest earned for Year 2 is closest to:

A. 3.4
5
B. 6.3
6
C. 4.4
5
D. 2.4
2
178 Data from Kempen Corporation's most recent balance sheet and the
. company's income statement appear below:

The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.7
1
B. 0.3
3
C. 0.2
4
D. 0.5
7

Essay Questions
179 Lundberg Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $50 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.36 per share.

Required:

Compute the following for Year 2:

a. Gross margin percentage.

b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
180 Guedea Corporation's most recent balance sheet and income statement
. appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.22 per share.

Required:

Compute the following for Year 2:

a. Gross margin percentage.

b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
181 Tubergen Corporation's most recent income statement appears below:
.

Required:

Compute the gross margin percentage.

182 Financial statements for Pracht Company appear below:
.
Dividends during Year 2 totaled $62 thousand, of which $15 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Required:

Compute the following for Year 2:

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 ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
183 Condensed financial statements for Blackhurst Company appear below:
.

There were 72,000 shares of common stock outstanding throughout the

year. Dividends on common stock amounted to $320,400 and dividends
on preferred stock amounted to $45,000. The market value of a share of
common stock was $54 at the end of the year.

Required:

On the basis of the information given above, fill in the blanks with the
appropriate figures:

Example: The gross margin as a percent of sales would be computed by

dividing $2,160,000 by $5,400,000.

a. The earnings per share of common stock for the year would be
computed by dividing _______________ by _________________.

b. The times interest earned for the year would be computed by dividing
_______________ by _________________.

c. The price-earnings ratio at the end of the year would be computed by

dividing _______________ by _________________.

d. The dividend payout ratio for the year would be computed by dividing
_______________ by _________________.

e. The dividend yield ratio for the year would be computed by dividing
_______________ by _________________.

f. The return on total assets 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 acid-test ratio at the end of the year would be computed by

dividing _______________ by _________________.

i. The accounts receivable turnover for the year would be computed by

dividing _______________ by _________________.

j. The inventory turnover for the year would be computed by dividing

_______________ by _________________.
k. The debt-to-equity ratio at the end of the year would be computed by
dividing _______________ by _________________.
184 Condensed financial statements for Pardin Company are given below:
.
The company paid total dividends of $100,000 during the year. At the
end of Year 2, the company's common stock was selling for $38 per
share.

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 Year 2 would be computed by

dividing $1,080,000 by $400,000.

a. The acid-test ratio at the end of Year 2 would be computed by dividing

_______________ by _________________.

b. The accounts receivable turnover during Year 2 would be computed by

dividing _______________ by _________________.

c. The inventory turnover during Year 2 would be computed by dividing

_______________ by _________________.

d. The times interest earned for Year 2 would be computed by dividing

_______________ by _________________.

e. The earnings per share of common stock for Year 2 would be computed
by dividing _______________ by _________________.

f. The return on total assets for Year 2 would be computed by dividing

_______________ by _________________.

g. The debt-to-equity ratio at the end of Year 2 would be computed by

dividing _______________ by _________________.

h. The dividend yield ratio would be computed by dividing _______________

by _________________.

i. The return on common stockholders' equity for Year 2 would be

computed by dividing _______________ by _________________.
j. Whether the common stockholders gained or lost from the use of
financial leverage during Year 2 would be determined by comparing the
ratio computed in question ___ above to the ratio computed in question
above ____. In this case, financial leverage is (positive/negative)
___________________.
185 Bedrosian Incorporated has a line of credit from the Belmont National
. Bank that is due to be renewed on February 1. The bank has requested
the company's current Income Statement and Comparative Statements
of Financial Position which appear below.
The bank has also requested that Bedrosian calculate a number of
financial ratios. Bedrosian's financial ratios have not yet been calculated
for this year, but the company's accounting staff has gathered the
following industry averages for the ratios from various sources.
Required:

a. Calculate the following financial ratios for this year for Bedrosian
Incorporated.

1. Return on total assets.

2. Return on common stockholders' equity.
3. Current ratio.
4. Acid-test ratio.
5. Debt-to-equity ratio.
6. Times interest earned.
7. Dividend payout ratio.

b. By comparing the ratios calculated in Requirement A with the industry

ratios, evaluate Bedrosian's operations.
186 Renbud Computer Services Co. (RCS) specializes in customized software
. development for the broadcast and telecommunications industries. The
company was started by three people in 1973 to develop software
primarily for a national network to be used in broadcasting national
election results. After sustained and manageable growth for many years,
the company has grown very fast over the last three years, doubling in
size.

This growth has placed the company in a challenging financial position.

Within thirty days, RCS will need to renew its $300,000 loan with the
Third State Bank of San Marcos. This loan is classified as a current
liability on RCS's balance sheet. Harvey Renbud, president of RCS, is
concerned about renewing the loan. The bank has requested RCS's most
recent financial statements which appear below, including balance
sheets for this year and last year. The bank has also requested four ratios
relating to operating performance and liquidity.
Required:

a. Explain why the Third State Bank of San Marcos would be interested in
reviewing Renbud Computer Services Co.'s comparative financial
statements and its financial ratios before renewing the loan.

b. Calculate the following financial ratios for Renbud Computer Services

Co:

1. The current ratio for both this year and last year.
2. Accounts receivable turnover for this year.
3. Return on common stockholders' equity for this year.
4. The debt-to-equity ratio for both this year and last year.

c. Discuss briefly the limitations and difficulties that can be encountered

in using ratio analysis.
187 Recent financial statements for Madison Company are given below:
.
Madison Company paid dividends of $3.15 per share during the year. The
company's common stock had a market price of $63 per share on
December 31. Assets at the beginning of the year totaled $1,100,000
and stockholders' equity totaled $725,000.

Required:

Compute the following:

a. Earnings per share of common stock.

b. Dividend payout ratio.
c. Dividend yield ratio.
d. Price-earnings ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Was financial leverage positive or negative for the year? Explain.
188 Financial statements for Qualle Company appear below:
.
Dividends during Year 2 totaled $149 thousand, of which $10 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $280.

Required:

Compute the following for Year 2:

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.
189 Debutiaco Corporation's most recent balance sheet and income
. statement appear below:
Dividends on common stock during Year 2 totaled $20 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $12.00 per share.

Required:

Compute the following for Year 2:

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.
190 Sweetman Corporation has provided the following financial data (in
. thousands of dollars):

Net income for Year 2 was $120 thousand. Interest expense was $25
thousand. The tax rate was 30%. Dividends on common stock during Year
2 totaled $80 thousand. Dividends on preferred stock totaled $20
thousand. The market price of common stock at the end of Year 2 was
$4.75 per share.

Required:

Compute the following for Year 2:

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.
191 Lunghofer Corporation's net income for the most recent year was
. $3,189,000. A total of 300,000 shares of common stock and 100,000
shares of preferred stock were outstanding throughout the year.
Dividends on common stock were $4.90 per share and dividends on
preferred stock were $1.95 per share.

Required:

Compute the earnings per share of common stock. Show your work!

192 Basta Corporation's net income last year was $1,401,000. The dividend
. on common stock was $1.00 per share and the dividend on preferred
stock was $3.90 per share. The market price of common stock at the end
of the year was $65.40 per share. Throughout the year, 300,000 shares
of common stock and 100,000 shares of preferred stock were
outstanding.

Required:

Compute the price-earnings ratio. Show your work!

193 Sabb Corporation's net income last year was $6,190,000. The dividend
. on common stock was $13.90 per share and the dividend on preferred
stock was $1.60 per share. The market price of common stock at the end
of the year was $41.50 per share. Throughout the year, 300,000 shares
of common stock and 100,000 shares of preferred stock were
outstanding.

Required:

Compute the dividend payout ratio. Show your work!

194 Last year, Bickham Corporation's dividend on common stock was $8.70
. per share and the dividend on preferred stock was $3.80 per share. The
market price of common stock at the end of the year was $66.10 per
share.

Required:

Compute the dividend yield ratio. Show your work!

195 Gulick Corporation's most recent income statement appears below:
.

The beginning balance of total assets was $320,000 and the ending
balance was $280,000.

Required:

Compute the return on total assets. Show your work!

196 Excerpts from Ruden Corporation's most recent balance sheet appear
. below:

Net income for Year 2 was $102,000. Dividends on common stock were
$47,000 in total and dividends on preferred stock were $15,000 in total.

Required:

Compute the return on common stockholders' equity. Show your work!

197 Data from Paynter Corporation's most recent balance sheet appear
. below:

A total of 100,000 shares of common stock and 20,000 shares of

preferred stock were outstanding at the end of the year.

Required:

Compute the book value per share. Show your work!

198 Financial statements for Rarig Company appear below:
.
Required:

Compute the following for Year 2:

a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
199 Malbrough Corporation's most recent balance sheet and income
. statement appear below:
Required:

Compute the following for Year 2:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
200 Excerpts from Stepney Corporation's most recent balance sheet (in
. thousands of dollars) appear below:

Sales on account during the year totaled $1,440 thousand. Cost of goods
sold was $890 thousand.

Required:

Compute the following for Year 2:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
201 Heningburg Corporation's total current assets are $230,000, its
. noncurrent assets are $530,000, its total current liabilities are $140,000,
its long-term liabilities are $370,000, and its stockholders' equity is
$250,000.

Required:

Compute the company's working capital. Show your work!

202 Gaskamp Corporation's total current assets are $270,000, its noncurrent
. assets are $610,000, its total current liabilities are $170,000, its long-
term liabilities are $400,000, and its stockholders' equity is $310,000.

Required:

Compute the company's current ratio. Show your work!

203 Data from Weichbrodt Corporation's most recent balance sheet appear
. below:

Required:

Compute the company's acid-test ratio. Show your work!

204 Millage Corporation has provided the following data:
.

Required:

Compute the accounts receivable turnover for this year. Show your
work!
205 Data from Adame Corporation's most recent balance sheet and income
. statement appear below:

Required:

Compute the average collection period for this year:

206 Eaglen Corporation has provided the following data:
.

Required:

Compute the inventory turnover for this year:

207 Data from Ankeny Corporation's most recent balance sheet and income
. statement appear below:

Required:

Compute the average sale period for this year:

208 Zide Corporation's most recent balance sheet and income statement
. appear below:
Required:

Compute the following for Year 2:

a. Times interest earned.

b. Debt-to-equity ratio.
209 Pettengill Corporation's net operating income last year was $280,000; its
. interest expense was $37,000; its total stockholders' equity was
$920,000; and its total liabilities were $620,000.

Required:

Compute the following for Year 2:

a. Times interest earned.

b. Debt-to-equity ratio.
210 Dehne Corporation has provided the following data from its most recent
. income statement:

Required:

Compute the times interest earned ratio. Show your work!

211 Schiff Corporation has provided the following data from its most recent
. balance sheet:

Required:

Compute the debt-to-equity ratio. Show your work!

 Chapter 13 Financial Statement Analysis Answer Key

True / False Questions

1. Horizontal analysis involves comparing two or more years' financial

data for a single company.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form

2. The gross margin percentage is computed by dividing the gross margin

by sales.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form

3. If a company's return on assets is substantially higher than its cost of

borrowing, then the common stockholders would normally want the
company to have a relatively high debt/equity ratio.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
4. Dividing the market price of a share of stock by the dividends per share
gives the price-earnings ratio.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

5. The dividend yield ratio is calculated by dividing dividends per share by

earnings per share.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

6. Financial leverage is positive if the interest rate on debt is lower than

the return on total assets.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

7. Issuing common stock will increase a company's financial leverage.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
8. If the assets in which borrowed funds are invested are able to earn a
rate of return greater than the interest rate required by the lender, then
financial leverage is positive.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

9. One would expect the book value of a share of stock to be about the
same as the stock's market value.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

10. The acid-test ratio is always smaller than the current ratio.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

11. All debt is considered in the computation of the acid-test ratio.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
12. When computing the acid-test ratio, a short-term note receivable would
be included in the numerator.

TRUE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

13. The purchase of marketable securities for cash will lower a firm's acid-
test ratio.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

14. As the inventory turnover increases, the number of days required to sell
the inventory one time also increases.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

15. Negative working capital indicates that the sum of all current assets is
negative.

FALSE
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
Multiple Choice Questions

16. The formula for the gross margin percentage is:

A. (Sales - Cost of goods sold)/Cost of goods

sold
B. (Sales - Cost of goods
sold)/Sales
C. Net
income/Sales
D. Net income/Cost of goods
sold
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form

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

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.

The gross margin percentage is a broad measure of profitability

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
 Topic: Statements in Comparative and Common-Size Form

18. The market price of XYZ Company's common stock dropped from $25
to $21 per share. The dividend paid per share remained unchanged.
The company's dividend payout ratio would:

A. increas
e.
B. decreas
e.
C. be
unchanged.
D. impossible to determine without more
information.

The dividend payout ratio is unaffected by market price (e.g., Dividend

payout ratio = Dividends per share ÷ Earnings per share)

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

19. A drop in the market price of a firm's common stock will immediately
affect its:

A. return on common stockholders'

equity.
B. current
ratio.
C. dividend payout
ratio.
D. dividend yield
ratio.

Dividend yield ratio = Dividends per share ÷ Market price per share

AACSB: Reflective Thinking

 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Source: CMA, adapted
Topic: Ratio Analysis—The Common Stockholder

20. Financial leverage is negative when:

A. the return on total assets is less than the rate of return 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.

If the rate of return on total assets is less than the rate of return the
company pays its creditors, financial leverage is negative

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
21. Which of the following is not a potential source of financial leverage?

A. Long-term
debt.
B. Common
stock.
C. Accounts
payable.
D. Interest
payable.

Financial leverage is obtained from current and long-term liabilities.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

22. Issuing new shares of stock in a five-for-one split of common stock

would:

A. decrease the book value per share of common

stock.
B. increase the book value per share of common
stock.
C. increase total stockholders'
equity.
D. decrease total stockholders'
equity.

If the number of shares increases the book value per share is decreased
as illustrated in the formula:
Book value per share = (Total stockholders' equity - Preferred stock) ÷
Number of common shares outstanding

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
 Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Source: CMA, adapted
Topic: Ratio Analysis—The Common Stockholder

23. A company's current ratio and acid-test ratios are both greater than 1.
Issuing bonds to finance purchase of an office building with the first
installment of the bonds due in the current year would:

A. decrease net working

capital.
B. decrease the current
ratio.
C. decrease the acid-test
ratio.
D. affect all of the above as
indicated.

The transaction would be as follows:

Current assets would remain unchanged while current liabilities would

increase, therefore all of the listed ratios would decrease.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Source: CMA, adapted
Topic: Ratio Analysis—The Short-Term Creditor
24. What is the effect of a purchase of inventory on account on the current
ratio and on working capital, respectively? (Assume a current ratio
greater than one prior to this transaction.)

A. Option
A
B. Option
B
C. Option
C
D. Option
D

The current ratio would decline since the same amount is added to the
numerator and denominator the fraction is reduced.
There would be no change to working capital since the increase in
current assets and current liabilities is the same.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
25. At the beginning of the year, a company's current ratio is 2.2. At the
end of the year, the company has a current ratio of 2.5. Which of the
following could help explain the change in the current ratio?

A. An increase in
inventories.
B. An increase in accounts
payable.
C. An increase in property, plant, and
equipment.
D. An increase in bonds
payable.

An increase in inventory would increase the current ratio. An increase in

accounts payable would decrease the current ratio. The other two
changes would have no effect on the current ratio.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
26. A company's current ratio and acid-test ratios are both greater than 1.
The collection of a current accounts receivable of $29,000 would:

A. increase the current

ratio.
B. decrease the current
ratio.
C. not affect the current ratio or the acid-
test ratio.
D. decrease the acid-test
ratio.

There would be no change in the current ratio or the acid-test ratio as

the collection of an account receivable is exchanging one current asset
for another current asset.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Source: CMA, adapted
Topic: Ratio Analysis—The Short-Term Creditor
27. Assume a company has a current ratio that is greater than 1. Which of
the following transactions will reduce the company's current ratio?

A. Selling office equipment at book

value.
B. Paying a cash dividend already
declared.
C. Borrowing by taking out a short-term
loan.
D. Selling equipment at a
loss.

When the current ratio is greater than 1 (e.g., $500 ÷ $400 = 1.25)
then increasing both portions of the fraction by an equal amount would
reduce the current ratio (e.g., $550 ÷ $450 = 1.22.)

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
28. Higgins Company presently has a current ratio of 0.6. It is currently
negotiating a loan, but it has been informed it must improve its current
ratio before the loan will be approved. Which of the following actions
would improve its current ratio?

A. Pay off a portion of its long-term

debt.
B. Use cash to pay off some current
liabilities.
C. Purchase additional inventory on
credit.
D. Collect some of the current accounts
receivable.

When the current ratio is less than 1 (e.g., $300 ÷ $500 = 0.6) then
increasing both portions of the fraction by an equal amount would
increase the current ratio (e.g., $350 ÷ $550 = 0.64.)

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
29. The ratio of cash, trade receivables, and marketable securities to
current liabilities is:

A. the working capital of a

company.
B. the acid-test
ratio.
C. the current
ratio.
D. the debt to equity
ratio.

Acid-test ratio = (Cash + Marketable securities + Accounts receivable +

Short-term notes receivable) ÷ Current liabilities

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

30. Wolbers Company has an acid-test ratio of 1.4. Which of the following
events will cause this ratio to decrease?

A. Selling merchandise on
account.
B. Paying a cash dividend already
declared.
C. Borrowing using a short-term
note.
D. Selling equipment at a
loss.

When the acid-test ratio is greater than 1 (e.g., $1,400 ÷ $1,000 = 1.4)
then increasing both portions of the fraction by an equal amount would
reduce the current ratio (e.g., $1,500 ÷ $1,100 = 1.36.)

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

31. Park Company purchased $100,000 in inventory from its suppliers, on

account. The company's acid-test ratio would:

A. increas
e.
B. decreas
e.
C. remain
unchanged.
D. be impossible to determine from the given
information.

Since inventory is excluded from the numerator in the acid-test ratio,

with the denominator increasing through the incursion of additional
accounts payable, the ratio would decrease.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
32. Assuming stable business conditions, an increase in the accounts
receivable turnover ratio could be explained by:

A. stricter policies with respect to the granting of credit to

customers.
B. an easing of policies with respect to the granting of credit to
customers.
C. a slowdown in collecting accounts receivables from
customers.
D. none of
these.

Stricter policies with respect to the granting of credit to customers

would likely increase the accounts receivable turnover ratio because
given customers in a stronger financial position and having more
liquidity would be more able to pay on time.

AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
33. Ozols Corporation's most recent income statement appears below:

The gross margin percentage is closest to:

A. 33.2
%
B. 55.7
%
C. 300.8
%
D. 125.6
%

Gross margin percentage = Gross margin ÷ Sales

= $358,000 ÷ $643,000 = $55.7%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form
34. Crandler Company's net income last year was $60,000. The company
paid preferred dividends of $20,000 and its average common
stockholders' equity was $500,000. The company's return on common
stockholders' equity for the year was closest to:

A. 16.0
%
B. 4.0
%
C. 8.0
%
D. 12.0
%

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($60,000 - $20,000) ÷ $500,000 = 8.0%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
35. The average stockholders' equity for Horn Co. last year was
$2,000,000. Included in this figure was $200,000 of preferred stock.
Preferred dividends were $16,000. If the return on common
stockholders' equity was 12.5% for the year, net income was:

A. $225,00
0
B. $250,00
0
C. $241,00
0
D. $234,00
0

Return on common stockholders' equity = (Net income - Preferred

dividends) ÷ Average common stockholders' equity
12.5% = (Net income - $16,000) ÷ ($2,000,000 - $200,000)
Net income -$16,000 = 12.5% × $1,800,000
Net income = 12.5% × $1,800,000 + $16,000
= $225,000 + $16,000 = $241,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
36. Artist Company's net income last year was $500,000. The company has
150,000 shares of common stock and 40,000 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 $1.70 per share on the common stock
and $0.70 per share on the preferred stock. The earnings per share of
common stock is closest to:

A. $3.1
5
B. $3.5
2
C. $1.6
3
D. $3.3
3

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($500,000 - 40,000 shares × $0.70 per share) ÷ 150,000 shares
= ($500,000 - $28,000) ÷ 150,000 shares = $3.15 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
37. Archer Company had net income of $40,000 last year. The company
has 5,000 shares of common stock and 2,500 shares of preferred stock
outstanding. There was no change in the number of common or
preferred shares outstanding during the year. Preferred dividends were
$2 per share. The earnings per share of common stock was:

A. $7.0
0
B. $8.0
0
C. $5.3
3
D. $7.5
0

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($40,000 - 2,500 shares × $2.00 per share) ÷ 5,000 shares
= ($40,000 - $5,000) ÷ 5,000 shares = $7.00 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
38. The following data have been taken from your company's financial
records for the current year:

The price-earnings ratio is:

A. 12.
5
B. 6.
0
C. 8.
0
D. 7.
5

Price-earnings ratio = Market price per share ÷ Earnings per share (see
above)
= $120 per share ÷ $15 per share = 8.0

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
39. The following data have been taken from your company's financial
records for the current year:

The price-earnings ratio is:

A. 7.
5
B. 10.
0
C. 9.
4
D. 13.
3

Price-earnings ratio = Market price per share ÷ Earnings per share

= $60 per share ÷ $8 per share = 7.5

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
40. Data concerning Bouerneuf Company's common stock follow:

The price-earnings ratio would be:

A. 2.0
0
B. 2.6
7
C. 3.0
0
D. 4.0
0

Price-earnings ratio = Market price per share ÷ Earnings per share

= $18 per share ÷ $6 per share = 3.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
41. Boggs Company has 40,000 shares of common stock outstanding. The
book value per share of this stock was $60.00 and the market value per
share was $75.00 at the end of the year. Net income for the year was
$400,000. Interest on long term debt was $40,000. Dividends paid to
common stockholders were $3.00 per share. The tax rate was 30%. The
company's price-earnings ratio at the end of the year was:

A. 2
5
B. 2
0
C. 7.5
0
D. 6.0
0

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding*
= $400,000 ÷ 40,000 shares = $10 per share

Price-earnings ratio = Market price per share ÷ Earnings per share (see
above)
= $75 per share ÷ $10 per share = 7.50

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
42. Last year the return on total assets in Jeffrey Company was 8.5%. The
total assets were 2.9 million at the beginning of the year and 3.1 million
at the end of the year. The tax rate was 30%, interest expense totaled
$110 thousand, and sales were $5.2 million. Net income for the year
was:

A. $145,00
0
B. $222,00
0
C. $332,00
0
D. $178,00
0

Average total assets = ($2,900,000 + $3,100,000) ÷ 2 = $3,000,000

Return on total assets = Adjusted net income ÷ Average total assets

8.5% = Adjusted net income ÷ $3,000,000
Adjusted net income = 8.5% × $3,000,000 = $255,000

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

$255,000 = Net income + [$110,000 × (1 - 0.30)]
Net income = $255,000 - $110,000 × 0.70 = $178,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
43. Brandon Company's net income last year was $65,000 and its interest
expense was $20,000. Total assets at the beginning of the year were
$640,000 and total assets at the end of the year were $690,000. The
company's income tax rate was 30%. The company's return on total
assets for the year was closest to:

A. 9.8
%
B. 10.7
%
C. 12.8
%
D. 11.9
%

Average total assets = ($640,000 + $690,000) ÷ 2 = $665,000

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $65,000 + [$20,000 × (1 - 0.30)] = $79,000

Return on total assets = Adjusted net income ÷ Average total assets

= $79,000 ÷ $665,000 = 11.9%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
44. The following account balances have been provided for the end of the
most recent year:

The book value per share of common stock is:

A. $2
2
B. $2
5
C. $2
0
D. $2
8

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding
= ($120,000 - $10,000) ÷ 5,000 shares = $22 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
45. Vessels Corporation's net income for the most recent year was
$2,532,000. A total of 200,000 shares of common stock and 200,000
shares of preferred stock were outstanding throughout the year.
Dividends on common stock were $3.80 per share and dividends on
preferred stock were $1.25 per share. The earnings per share of
common stock is closest to:

A. $12.6
6
B. $8.8
6
C. $7.6
1
D. $11.4
1

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($2,532,000 - 200,000 shares × $1.25 per share) ÷ 200,000 shares
= ($2,532,000 - $250,000) ÷ 200,000 shares = $11.41 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
46. Tronnes Corporation's net income last year was $1,750,000. The
dividend on common stock was $2.60 per share and the dividend on
preferred stock was $2.50 per share. The market price of common stock
at the end of the year was $57.70 per share. Throughout the year,
300,000 shares of common stock and 100,000 shares of preferred stock
were outstanding. The price-earnings ratio is closest to:

A. 17.8
5
B. 11.5
4
C. 24.0
4
D. 9.8
9

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($1,750,000 - 100,000 shares × $2.50 per share) ÷ 300,000 shares
= ($1,750,000 - $250,000) ÷ 300,000 shares = $5.00 per share

Price-earnings ratio = Market price per share ÷ Earnings per share (see
above)
= $57.70 per share ÷ $5.00 per share = 11.54

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
47. Delatrinidad Corporation's net income last year was $7,736,000. The
dividend on common stock was $12.60 per share and the dividend on
preferred stock was $2.80 per share. The market price of common stock
at the end of the year was $53.30 per share. Throughout the year,
400,000 shares of common stock and 200,000 shares of preferred stock
were outstanding. The dividend payout ratio is closest to:

A. 0.7
0
B. 0.6
5
C. 2.3
6
D. 1.8
7

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($7,736,000 - 200,000 shares × $2.80 per share) ÷ 400,000 shares
= ($7,736,000 - $560,000) ÷ 400,000 shares = $17.94 per share

Dividend payout ratio = Dividends per share ÷ Earnings per share

= $12.60 per share ÷ $17.94 per share = 0.70

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
48. Last year, Shadow Corporation's dividend on common stock was $9.90
per share and the dividend on preferred stock was $1.00 per share. The
market price of common stock at the end of the year was $68.10 per
share. The dividend yield ratio is closest to:

A. 0.1
5
B. 0.1
6
C. 0.9
1
D. 0.0
1

Dividend yield ratio = Dividends per share ÷ Market price per share
= $9.90 per share ÷ $68.10 per share = 0.15

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
49. Hagerman Corporation's most recent income statement appears below:

The beginning balance of total assets was $140,000 and the ending
balance was $90,000. The return on total assets is closest to:

A. 18.3
%
B. 24.3
%
C. 34.8
%
D. 26.1
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $21,000 + [$10,000 × (1 - 0.30)] = $28,000

Average total assets = ($140,000 + $90,000) ÷ 2 = $115,000

Return on total assets = Adjusted net income ÷ Average total assets

= $28,000 ÷ $115,000 = 24.3%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
50. Excerpts from Lasso Corporation's most recent balance sheet appear
below:

Net income for Year 2 was $145,000. Dividends on common stock were
$55,000 in total and dividends on preferred stock were $20,000 in total.
The return on common stockholders' equity for Year 2 is closest to:

A. 12.3
%
B. 8.1
%
C. 13.0
%
D. 14.3
%

Average common stockholders' equity = ($1,050,000 + $980,000) ÷ 2

= $1,015,000

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($145,000 - $20,000) ÷ $1,015,000 = 12.3%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
51. Data from Saldivar Corporation's most recent balance sheet appear
below:

A total of 150,000 shares of common stock and 40,000 shares of

preferred stock were outstanding at the end of the year. The book value
per share is closest to:

A. $2.7
3
B. $5.0
0
C. $6.5
3
D. $7.8
7

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding
= $980,000 ÷ 150,000 shares = $6.53 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
52. Drama Company's working capital is $16,000 and its current liabilities
are $94,000. The company's current ratio is closest to:

A. 1.1
7
B. 0.1
7
C. 6.8
8
D. 0.8
3

Current assets = Working capital + Current liabilities

= $94,000 + $16,000 = $110,000

Current ratio = Current assets ÷ Current liabilities

= $110,000 ÷ $94,000 = 1.17

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
53. Selected year-end data for the Brayer Company are presented below:

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. 1.2
0
B. 2.4
0
C. 1.6
7
D. 2.3
3

Current ratio = Current assets ÷ Current liabilities

3.0 = Current assets ÷ $600,000
Current assets = 3.0 × $600,000 = $1,800,000

Acid-test ratio = Quick assets ÷ Current liabilities

2.5 = Quick assets ÷ $600,000
Quick assets = 2.5 × $600,000 = $1,500,000

Current assets = Inventory + Quick assets

$1,800,000 = Inventory + $1,500,000
Inventory = $1,800,000 - $1,500,000 = $300,000

Since the inventory remained unchanged throughout the year, the

average inventory balance was $300,000.

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $500,000 ÷ $300,000 = 1.67
 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Source: CMA, adapted
Topic: Ratio Analysis—The Short-Term Creditor

54. Brewster Company has an acid-test ratio of 1.5 and a current ratio of
2.5. Current assets equal $200,000, of which $10,000 is prepaid
expenses. The company's current assets consist of cash, marketable
securities, accounts receivable, prepaid expenses, and inventory.
Brewster Company's inventory must be:

A. $30,00
0
B. $110,00
0
C. $70,00
0
D. $80,00
0

Current ratio = Current assets ÷ Current liabilities

2.5 = $200,000 ÷ Current liabilities
Current liabilities = $200,000 ÷ 2.5 = $80,000

Acid-test ratio = Quick assets ÷ Current liabilities

1.5 = Quick assets ÷ $80,000
Quick assets = 1.5 × $80,000 = $120,000

Current assets = Quick assets + Inventory + Prepaid expenses

$200,000 = $120,000 + Inventory + $10,000
Inventory = $200,000 - $120,000 - $10,000 = $70,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
55. Cotuit Company has a current ratio of 3.2 and an acid-test ratio of 2.4.
The company's current assets consist of cash, marketable securities,
accounts receivable, and inventory. The company's inventory is
$40,000. Cotuit Company's current liabilities must be:

A. $40,00
0
B. $120,00
0
C. $50,00
0
D. $32,00
0

Current assets = Quick assets + Inventory

Current assets = Quick assets + $40,000

Acid-test ratio = Quick assets ÷ Current liabilities

2.4 = Quick assets ÷ Current liabilities
Quick assets = 2.4 × Current liabilities

Current ratio = Current assets ÷ Current liabilities

3.2 = Current assets ÷ Current liabilities
3.2 = (Quick assets + $40,000) ÷ Current liabilities
3.2 = (2.4 × Current liabilities + $40,000) ÷ Current liabilities
3.2 = 2.4 + $40,000 ÷ Current liabilities
(3.2 - 2.4) = $40,000 ÷ Current liabilities
0.8 = $40,000 ÷ Current liabilities
Current liabilities = $40,000 ÷ 0.8 = $50,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
56. Erastic Company has $14,000 in cash, $8,000 in marketable securities,
$34,000 in account receivable, $40,000 in inventories, and $42,000 in
current liabilities. The company's current assets consist of cash,
marketable securities, accounts receivable, and inventory. The
company's acid-test ratio is closest to:

A. 1.3
3
B. 0.8
1
C. 2.2
9
D. 1.1
4

Quick assets = Cash + Marketable securities + Accounts receivable

= $14,000 + $8,000 + $34,000 = $56,000

Acid-test ratio = Quick assets ÷ Current liabilities = $56,000 ÷ $42,000

= 1.33

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
57. Fraser 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 $14,000. The company's accounts
receivable turnover was closest to:

A. 5.4
2
B. 13.0
0
C. 9.2
9
D. 10.8
3

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance*
= $130,000 ÷ $12,000 = 10.83
*Average accounts receivable balance = ($10,000 + $14,000) ÷ 2 =
$12,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
58. Grasse Company had $160,000 in sales on account last year. The
beginning accounts receivable balance was $10,000 and the ending
accounts receivable balance was $12,000. The company's average
collection period was closest to:

A. 25.09
days
B. 22.81
days
C. 50.19
days
D. 27.38
days

Average accounts receivable balance = ($10,000 + $12,000) ÷ 2 =

$11,000

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $160,000 ÷ $11,000 = 14.55

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 14.55 = 25.09 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
59. Harbor Company, a retailer, had cost of goods sold of $170,000 last
year. The beginning inventory balance was $20,000 and the ending
inventory balance was $24,000. The company's inventory turnover was
closest to:

A. 7.0
8
B. 7.7
3
C. 3.8
6
D. 8.5
0

Average inventory balance = ($20,000 + $24,000) ÷ 2 = $22,000

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $170,000 ÷ $22,000 = 7.73

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
60. Irastan Company, a retailer, had cost of goods sold of $250,000 last
year. The beginning inventory balance was $28,000 and the ending
inventory balance was $20,000. The company's average sale period
was closest to:

A. 40.88
days
B. 29.20
days
C. 35.03
days
D. 70.08
days

Average inventory balance = ($28,000 + $20,000) ÷ 2 = $24,000

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $250,000 ÷ $24,000 = 10.42

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 10.42 = 35.03 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
61. Deschambault Corporation's total current assets are $260,000, its
noncurrent assets are $700,000, its total current liabilities are
$130,000, its long-term liabilities are $510,000, and its stockholders'
equity is $320,000. Working capital is:

A. $260,00
0
B. $320,00
0
C. $190,00
0
D. $130,00
0

Working capital = Current assets - Current liabilities

= $260,000 - $130,000 = $130,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
62. Ladabouche Corporation's total current assets are $390,000, its
noncurrent assets are $630,000, its total current liabilities are
$330,000, its long-term liabilities are $420,000, and its stockholders'
equity is $270,000. The current ratio is closest to:

A. 0.8
5
B. 0.7
9
C. 1.1
8
D. 0.6
2

Current ratio = Current assets ÷ Current liabilities

= $390,000 ÷ $330,000 = 1.18

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
63. Data from Adamis Corporation's most recent balance sheet appear
below:

The company's acid-test ratio is closest to:

A. 0.3
3
B. 0.7
1
C. 0.8
1
D. 0.1
0

Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= $10,000 + $24,000 + $40,000 + $0 = $74,000

Acid-test ratio = Quick assets ÷ Current liabilities

= $74,000 ÷ $104,000 = 0.71

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
64. Bonine Corporation has provided the following data:

The accounts receivable turnover for this year is closest to:

A. 0.8
3
B. 8.9
4
C. 9.8
5
D. 1.2
0

Average accounts receivable balance = ($88,000 + $106,000) ÷ 2 =

$97,000

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $867,000 ÷ $97,000 = 8.94

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
65. Data from Concepcion Corporation's most recent balance sheet and
income statement appear below:

The average collection period for this year is closest to:

A. 54.3
days
B. 7.4
days
C. 7.2
days
D. 54.7
days

Average accounts receivable balance = ($120,000 + $118,000) ÷ 2 =

$119,000

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $800,000 ÷ $119,000 = 6.72

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 6.72 = 54.3 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
66. Kaelker Corporation has provided the following data:

The inventory turnover for this year is closest to:

A. 3.3
6
B. 0.8
7
C. 1.1
5
D. 3.1
5

Average inventory balance = ($213,000 + $186,000) ÷ 2 = $199,500

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $671,000 ÷ $199,500 = 3.36

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
67. Data from Davoren Corporation's most recent balance sheet and
income statement appear below:

The average sale period for this year is closest to:

A. 55.7
days
B. 64.4
days
C. 112.0
days
D. 122.1
days

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $522,000 ÷ $174,500* = 2.99
*Average inventory balance = ($160,000 + $189,000) ÷ 2 = $174,500

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 2.99 = 122.1 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
68. Last year Jason Company had a net income of $250,000, income tax
expense of $78,000, and interest expense of $30,000. The company's
times interest earned was closest to:

A. 4.7
3
B. 9.3
3
C. 11.9
3
D. 8.3
3

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= ($250,000 + $78,000 + $30,000) ÷ $30,000 = 11.93

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
69. Jersey Corporation has total interest expense of $10,000, sales of $1
million, a tax rate of 40%, and net income (after taxes) of $60,000.
What is this firm's times interest earned ratio?

A. 1
6
B. 1
1
C. 1
0
D. 7

Earnings after tax = Earnings before tax - Income tax

Earnings after tax = Earnings before tax - 0.4 × Earnings before tax
Earnings after tax = Earnings before tax × (1 - 0.4)
Earnings before tax = Earnings after tax ÷ (1 - 0.4)
= $60,000 ÷ (1 - 0.4) = $100,000

Earnings before interest and taxes = $100,000 + $10,000 = $110,000

Times interest earned = Earnings before interest expense and income
taxes ÷ Interest expense
= $110,000 ÷ $10,000 = 11

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
70. Krast Company has total assets of $160,000 and total liabilities of
$70,000. The company's debt-to-equity ratio is closest to:

A. 0.5
6
B. 0.4
4
C. 0.3
0
D. 0.7
8

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $70,000 ÷ $90,000* = 0.78
*Stockholders' equity = Total assets - Total liabilities = $160,000 -
$70,000 = $90,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
71. Pia Corporation has provided the following data from its most recent
income statement:

The times interest earned ratio is closest to:

A. 2.0
9
B. 1.0
9
C. 0.7
6
D. 2.9
8

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $71,000 ÷ $34,000 = 2.09

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
72. Damon Corporation has provided the following data from its most
recent balance sheet:

The debt-to-equity ratio is closest to:

A. 0.1
7
B. 6.0
0
C. 0.8
6
D. 7.0
0

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $540,000 ÷ $90,000 = 6.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
73. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The gross margin percentage for Year 2 is closest to:

A. 41.5
%
B. 70.9
%
C. 15.2
%
D. 658.8
%

Gross margin percentage = Gross margin ÷ Sales = $560 ÷ $1,350 =

41.5%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form
74. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $0.4
0
B. $0.7
3
C. $0.6
1
D. $0.4
3

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($85 - $5) ÷ 200 shares = $0.40 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
75. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The price-earnings ratio for Year 2 is closest to:

A. 9.6
4
B. 16.3
7
C. 11.5
4
D. 17.6
0

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($85 - $5) ÷ 200 shares = $0.40 per share

Price-earnings ratio = Market price per share ÷ Earnings per share

= $7.04 ÷ $0.40 = 17.60

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
76. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The dividend payout ratio for Year 2 is closest to:

A. 81.3
%
B. 75.0
%
C. 70.6
%
D. 1250.0
%

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($85 - $5) ÷ 200 shares = $0.40 per share

Dividends per share = Common dividends ÷ Common shares

= $60 ÷ 200 shares = $0.30 per share

Dividend payout ratio = Dividends per share ÷ Earnings per share

 = $0.30 ÷ $0.40 = 75.0%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
77. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The dividend yield ratio for Year 2 is closest to:

A. 0.36
%
B. 92.31
%
C. 4.26
%
D. 4.62
%

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Dividends per share = Common dividends ÷ Common shares

= $60 ÷ 200 shares = $0.30 per share

Dividend yield ratio = Dividends per share (see above) ÷ Market price
per share
= $0.30 ÷ $7.04 = 4.26%

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
78. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The return on total assets for Year 2 is closest to:

A. 7.85
%
B. 7.77
%
C. 6.51
%
D. 6.44
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $85 + [$25 × (1 - 0.30)] = $102.5

Average total assets = ($1,320 + $1,290) ÷ 2 = $1,305

Return on total assets = Adjusted net income ÷ Average total assets

= $102.5 ÷ $1,305 = 7.85%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
79. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 11.33
%
B. 10.00
%
C. 10.67
%
D. 9.41
%

Average common stockholders' equity = ($760 + $740) ÷ 2 = $750

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($85 - $5) ÷ $750 = 10.67%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
80. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The book value per share at the end of Year 2 is closest to:

A. $6.6
0
B. $4.3
0
C. $3.8
0
D. $0.4
0

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding = $760 ÷ 200 shares = $3.80 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
81. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The working capital at the end of Year 2 is:

A. $610
thousand
B. $860
thousand
C. $310
thousand
D. $710
thousand

Working capital = Current assets - Current liabilities

= $610 thousand - $300 thousand = $310 thousand

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
82. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The current ratio at the end of Year 2 is closest to:

A. 2.0
3
B. 0.3
5
C. 0.7
5
D. 0.4
6

Current ratio = Current assets ÷ Current liabilities = $610 ÷ $300 =

2.03

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
83. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The acid-test ratio at the end of Year 2 is closest to:

A. 2.0
3
B. 1.4
7
C. 1.6
0
D. 1.3
3

Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= $180 + $0 + $260 = $440

Acid-test ratio = Quick assets ÷ Current liabilities = $440 ÷ $300 =

1.47

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
84. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The accounts receivable turnover for Year 2 is closest to:

A. 5.1
9
B. 5.4
0
C. 1.0
8
D. 0.9
2

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,350 ÷ $250* = 5.40
*Average accounts receivable balance = ($260 + $240) ÷ 2 = $250

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
85. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The average collection period for Year 2 is closest to:

A. 0.9
days
B. 70.3
days
C. 1.1
days
D. 67.6
days

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,350 ÷ $250* = 5.40
*Average accounts receivable balance = ($260 + $240) ÷ 2 = $250

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.40 = 67.6 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
86. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The inventory turnover for Year 2 is closest to:

A. 0.9
3
B. 1.0
8
C. 5.8
5
D. 6.0
8

Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $790 ÷ $135 = 5.85
*Average inventory balance = ($130 + $140) ÷ 2 = $135

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
87. Hartzog Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The average sale period for Year 2 is closest to:

A. 60.0
days
B. 35.1
days
C. 62.4
days
D. 213.6
days

Average inventory balance = ($130 + $140) ÷ 2 = $135

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $790 ÷ $135 = 5.85

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 5.85 = 62.4 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
88. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The times interest earned for Year 2 is closest to:

A. 3.4
0
B. 8.3
4
C. 4.8
4
D. 5.8
4

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $146 ÷ $25 = 5.84

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
89. Hartzog Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $5 thousand. The market price of
common stock at the end of Year 2 was $7.04 per share.

The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.6
1
B. 0.2
8
C. 0.5
3
D. 0.1
9

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $460 ÷ $860 = 0.53

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
90. Hick Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The gross margin percentage for Year 2 is closest to:

A. 82.9
%
B. 45.3
%
C. 446.2
%
D. 22.4
%

Gross margin percentage = Gross margin ÷ Sales = $580 ÷ $1,280 =

45.3%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form
91. Hick Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $0.5
5
B. $0.9
3
C. $1.0
1
D. $0.6
5

Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($130 - $20) ÷ 200 shares = $0.55 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
92. Hick Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The price-earnings ratio for Year 2 is closest to:

A. 14.7
2
B. 17.4
0
C. 9.4
8
D. 10.2
9

Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($130 - $20) ÷ 200 shares = $0.55 per share

Price-earnings ratio = Market price per share ÷ Earnings per share (see
above)
= $9.57 ÷ $0.55 = 17.40
 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
93. Hick Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The dividend payout ratio for Year 2 is closest to:

A. 72.7
%
B. 54.5
%
C. 46.2
%
D. 1818.2
%

Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 per share = 200 shares

Dividends per share = Common dividends ÷ Common shares

= $60 ÷ 200 shares = $0.30 per share

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($130 - $20) ÷ 200 shares = $0.55 per share

Dividend payout ratio = Dividends per share ÷ Earnings per share

 = $0.30 ÷ $0.55 = 54.5%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
94. Hick Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The dividend yield ratio for Year 2 is closest to:

A. 1.05
%
B. 4.18
%
C. 75.00
%
D. 3.13
%

Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 per share = 200 shares

Dividends per share = Common dividends ÷ Common shares

= $60 ÷ 200 shares = $0.30 per share

Dividend yield ratio = Dividends per share ÷ Market price per share
= $0.30 ÷ $9.57 = 3.13%

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
95. Hick Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The return on total assets for Year 2 is closest to:

A. 9.35
%
B. 10.23
%
C. 9.42
%
D. 10.16
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $130 + [$16 × (1 - 0.30)] = $141.2

Average total assets = ($1,390 + $1,370) ÷ 2 = $1,380

Return on total assets = Adjusted net income ÷ Average total assets

= $141.2 ÷ $1,380 = 10.23%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
96. Hick Corporation's most recent balance sheet and income statement
appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 12.44
%
B. 13.02
%
C. 15.38
%
D. 10.53
%

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($130 - $20) ÷ $845* = 13.02%
*Average common stockholders' equity = ($870 + $820) ÷ 2 = $845

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
97. Hick Corporation's most recent balance sheet and income statement
appear below:
 Dividends on common stock during Year 2 totaled $60 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.57 per share.

The book value per share at the end of Year 2 is closest to:

A. $4.3
5
B. $5.3
5
C. $0.5
5
D. $6.9
5

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding = $870 ÷ 200 shares* = $4.35 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 per share = 200 shares

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
98. Selected financial data from Osterville Company for the most recent
year appear below:

The income tax rate is 40%.

Net income as a percentage of sales was:

A. 5
%
B. 3
%
C. 2.25
%
D. 1.75
%

Net income percentage = Net income ÷ Sales = $24 ÷ $800 = 3%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form

99. Selected financial data from Osterville Company for the most recent
year appear below:

The income tax rate is 40%.

Net operating income as a percentage of sales was:

A. 40
%
B. 30
%
C. 10
%
D. 5
%

Net operating income percentage = Net operating income ÷ Sales =

$80 ÷ $800 = 10%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form
100. Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's earnings per share of common stock for Year 2 was
closest to:

A. $7.2
3
B. $2.2
7
C. $10.9
1
D. $7.6
4

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($336 - $18) ÷ (44 shares* + 44 shares*)/2 = $7.23 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $220 ÷ $5 per share = 44 shares

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
101. Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's dividend yield ratio on December 31, Year 2 was

closest to:

A. 3.1
%
B. 1.1
%
C. 3.5
%
D. 2.7
%

Number of common shares outstanding = Common stock ÷ Par value

= $220 ÷ $5 per share = 44 shares

Dividends per share = Common dividends ÷ Common shares

= ($156 - $18) ÷ 44 shares = $3.14 per share

Dividend yield ratio = Dividends per share ÷ Market price per share
 = $3.14 per share ÷ $100 per share = 3.1%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
102. Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's return on total assets for Year 2 was closest to:

A. 15.5
%
B. 15.9
%
C. 16.5
%
D. 14.5
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $336 + [$30 × (1 - 0.30)] = $357

Average total assets = ($2,210 + $2,130) ÷ 2 = $2,170

Return on total assets = Adjusted net income ÷ Average total assets

= $357 ÷ $2,170 = 16.5%

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
103. Financial statements for Orange Company appear below:
 Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's current ratio at the end of Year 2 was closest to:

A. 1.2
4
B. 0.5
5
C. 0.4
4
D. 1.7
1

Current ratio = Current assets ÷ Current liabilities = $530 ÷ $310 =

1.71

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
104. Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's accounts receivable turnover for Year 2 was closest

to:

A. 15.
7
B. 11.
0
C. 17.
7
D. 12.
4

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $2,830 ÷ $180* = 15.7
*Average accounts receivable balance = ($180 + $180) ÷ 2 = $180

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
105. Financial statements for Orange Company appear below:
Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's average sale period for Year 2 was closest to:

A. 23.2
days
B. 29.5
days
C. 33.2
days
D. 20.6
days

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $1,980 ÷ $160* = 12.38
*Average inventory balance = ($160 + $160) ÷ 2 = $160

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 12.38 = 29.5 days

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
106. Financial statements for Orange Company appear below:
 Dividends during Year 2 totaled $156 thousand, of which $18 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $100.

Orange Company's times interest earned for Year 2 was closest to:

A. 16.
0
B. 28.
3
C. 17.
0
D. 11.
2

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $510 ÷ $30 = 17.0

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
107. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's current ratio at December 31 was closest to:

A. 1.9
5
B. 2.6
7
C. 1.3
3
D. 2.0
0

Current ratio = Current assets ÷ Current liabilities

= ($90 + $150 + $150 + $10) ÷ ($150 + $25 + $20 + $5)
= $400 ÷ $200 = 2.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
108. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's times interest earned ratio for the year was closest
to:

A. 11.
0
B. 10.
5
C. 12.
0
D. 22.
0

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $110 ÷ $10 = 11.0

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
109. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's acid-test ratio at December 31 was closest to:

A. 0.4
5
B. 0.8
3
C. 2.0
0
D. 1.2
0

Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= $90 + $0 + $150 = $240

Current liabilities = Accounts payable + Accrued expenses payable +

Income taxes payable + Interest payable) = $150 + $25 + $20 + $5 =
$200
 Acid-test ratio = Quick assets ÷ Current liabilities = $240 ÷ $200 =
1.20

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
110. Financial statements for Harwich Company for the most recent year
appear below:
 The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's inventory turnover ratio for the year was closest
to:

A. 8
B. 3
C. 5
D. 7.
5

Inventory turnover = Cost of goods sold ÷ Average inventory balance =

$750 ÷ $150 = 5

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
111. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's average collection period for the year was closest
to:

A. 72
days
B. 8
days
C. 120
days
D. 46
days

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,200 ÷ $150 = 8

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 8 = 46 days
 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
112. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's price-earnings ratio at December 31 was closest

to:

A. 3.0
0
B. 8.2
5
C. 8.0
0
D. 7.2
5

Number of common shares outstanding = Common stock ÷ Par value

= $20 ÷ $1 per share = 20 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($60 - $0) ÷ (20 shares + 20 shares)/2 = $3.00 per share
 Price-earnings ratio = Market price per share ÷ Earnings per share
= $24.00 ÷ $3.00 = 8.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
113. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's book value per share at December 31 was closest

to:

A. $7.0
0
B. $15.0
0
C. $24.0
0
D. $30.0
0

Number of common shares outstanding = Common stock ÷ Par value

= $20 ÷ $1 per share = 20 shares

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding = $300 ÷ 20 shares = $15.00 per share

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
114. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's dividend payout ratio for the year was closest to:

A. 75
%
B. 25
%
C. 5
%
D. 3.125
%

Number of common shares outstanding = Common stock ÷ Par value

= $20 ÷ $1 per share = 20 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($60 - $0) ÷ (20 shares + 20 shares)/2 = $3.00 per share

Dividend payout ratio = Dividends per share ÷ Earnings per share

 = $0.75 ÷ $3.00 = 25%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
115. Financial statements for Harwich Company for the most recent year
appear below:
The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's debt-to-equity ratio at the end of the year was

closest to:

A. 0.3
3
B. 0.5
0
C. 0.6
7
D. 1.0
0

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $300 ÷

$300 = 1.00

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
116. Financial statements for Harwich Company for the most recent year
appear below:
 The balances in the Cash, Accounts Receivable, Inventory, Bonds
Payable, Common Stock, and Additional Paid-In Capital accounts are
unchanged from the beginning of the year. A $0.75 per share dividend
was declared and paid during the year. On December 31, Harwich
Company's common stock was trading at $24.00 per share.

Harwich Company's dividend yield ratio for the year was closest to:

A. 3.125
%
B. 12.500
%
C. 9.125
%
D. 25.000
%

Dividend yield ratio = Dividends per share ÷ Market price per share
= $0.75 per share ÷ $24.00 per share = 3.125%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
117. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's earnings per share of common stock for Year 2 was
closest to:

A. $18.3
9
B. $27.2
2
C. $19.0
6
D. $11.0
3

Number of common shares outstanding = Common stock ÷ Par value

= $180 ÷ $10 per share = 18 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($343 - $12) ÷ (18 shares + 18 shares)/2 = $18.39 per share

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
118. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's price-earnings ratio on December 31, Year 2 was

closest to:

A. 5.8
8
B. 14.5
0
C. 8.7
0
D. 8.4
0

Number of common shares outstanding = Common stock ÷ Par value

= $180 ÷ $10 per share = 18 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($343 - $12) ÷ (18 shares + 18 shares)/2 = $18.39 per share

Price-earnings ratio = Market price per share ÷ Earnings per share

 = $160 ÷ $18.39 = 8.70

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
119. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's dividend payout ratio for Year 2 was closest to:

A. 75.8
%
B. 28.5
%
C. 76.7
%
D. 47.4
%

Number of common shares outstanding = Common stock ÷ Par value

= $180 ÷ $10 per share = 18 shares

Dividends per share = Common dividends ÷ Common shares

= ($263 - $12) ÷ 18 shares = $13.94 per share

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($343 - $12) ÷ (18 shares + 18 shares)/2 = $18.39 per share
 Dividend payout ratio = Dividends per share ÷ Earnings per share
= $13.94 ÷ $18.39 = 75.8%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
120. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's dividend yield ratio on December 31, Year 2 was

closest to:

A. 8.7
%
B. 9.1
%
C. 8.3
%
D. 5.5
%

Number of common shares outstanding = Common stock ÷ Par value

= $180 ÷ $10 per share = 18 shares

Dividends per share = Common dividends ÷ Common shares

= ($263 - $12) ÷ 18 shares = $13.94 per share

Dividend yield ratio = Dividends per share ÷ Market price per share
 = $13.94 per share ÷ $160 per share = 8.7%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
121. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's return on total assets for Year 2 was closest to:

A. 15.8
%
B. 17.2
%
C. 18.6
%
D. 17.8
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $343 + [$40 × (1 - 0.30)] = $371

Average total assets = ($2,040 + $1,950) ÷ 2 = $1,995

Return on total assets = Adjusted net income ÷ Average total assets

= $371 ÷ $1,995 = 18.6%

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
122. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's return on common stockholders' equity for Year 2

was closest to:

A. 29.8
%
B. 26.9
%
C. 30.9
%
D. 27.9
%

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($343 - $12) ÷ $1,110* = 29.8%
*Average common stockholders' equity = ($1,150 + $1,070) ÷ 2 =
$1,110

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
123. Financial statements for Larned Company appear below:
Dividends during Year 2 totaled $263 thousand, of which $12 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Larned Company's book value per share at the end of Year 2 was
closest to:

A. $16.1
1
B. $63.8
9
C. $70.5
6
D. $10.0
0

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding = $1,150 ÷ 18 shares* = $63.89 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $180 ÷ $10 per share = 18 shares

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

124. The following selected data are for Geneva Company:

Geneva Company's return on common stockholders' equity for Year 2 is

closest to:

A. 11
%
B. 12
%
C. 13
%
D. 6
%

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($110 - $12) ÷ $825* = 12%
*Average common stockholders' equity = ($850 + $800) ÷ 2 = $825

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
125. The following selected data are for Geneva Company:

The earnings per share of common stock for Year 2 is closest to:

A. $1.6
0
B. $2.0
7
C. $3.2
7
D. $3.6
7

Number of common shares outstanding = Common stock ÷ Par value

= $600 ÷ $20 per share = 30 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($110 - $12) ÷ (30 shares + 30 shares)/2 = $3.27 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
126. Cadarette Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $1.0
0
B. $1.6
0
C. $1.4
3
D. $0.9
0

Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 per share = 100 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($100 - $10) ÷ (100 shares + 100 shares)/2 = $0.90 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
127. Cadarette Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The price-earnings ratio for Year 2 is closest to:

A. 11.0
8
B. 12.4
0
C. 19.7
0
D. 17.7
3

Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 per share = 100 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($100 - $10) ÷ (100 shares + 100 shares)/2 = $0.90 per share

Price-earnings ratio = Market price per share ÷ Earnings per share

= $17.73 ÷ $0.90 = 19.70

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
128. Cadarette Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The dividend payout ratio for Year 2 is closest to:

A. 55.6
%
B. 44.4
%
C. 40.0
%
D. 1111.1
%

Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 per share = 100 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($100 - $10) ÷ (100 shares + 100 shares)/2 = $0.90 per share

Dividends per share = Common dividends ÷ Common shares

= $40 ÷ 100 shares = $0.40 per share

Dividend payout ratio = Dividends per share ÷ Earnings per share

 = $0.40 ÷ $0.90 = 44.4%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
129. Cadarette Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The dividend yield ratio for Year 2 is closest to:

A. 2.26
%
B. 2.82
%
C. 80.00
%
D. 0.56
%

Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 per share = 100 shares

Dividends per share = Common dividends ÷ Common shares

= $40 ÷ 100 shares = $0.40 per share

Dividend yield ratio = Dividends per share ÷ Market price per share
= $0.40 ÷ $17.73 = 2.26%

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
130. Cadarette Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The return on total assets for Year 2 is closest to:

A. 7.75
%
B. 8.67
%
C. 7.69
%
D. 8.61
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $100 + [$17 × (1 - 0.30)] = $111.9

Average total assets = ($1,300 + $1,280) ÷ 2 = $1,290

Return on total assets = Adjusted net income ÷ Average total assets

= $111.9 ÷ $1,290 = 8.67%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
 Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
131. Cadarette Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 11.43
%
B. 11.61
%
C. 10.29
%
D. 12.90
%

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($100 - $10) ÷ $775* = 11.61%
*Average common stockholders' equity = ($800 + $750) ÷ 2 = $775

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
132. Cadarette Corporation's most recent balance sheet and income
statement appear below:
 Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $17.73 per share.

The book value per share at the end of Year 2 is closest to:

A. $8.0
0
B. $0.9
0
C. $13.0
0
D. $9.0
0

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding = $800 ÷ 100 shares* = $8.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $100 ÷ $1 per share = 100 shares

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
133. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The earnings per share of common stock for Year 2 is closest to:

A. $0.3
5
B. $0.5
0
C. $0.3
0
 D. $0.6
5

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($70 - $10) ÷ (200 shares + 200 shares)/2 = $0.30 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
134. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The price-earnings ratio for Year 2 is closest to:

A. 8.2
2
B. 15.2
6
C. 17.8
0
 D. 10.6
8

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($70 - $10) ÷ (200 shares + 200 shares)/2 = $0.30 per share

Price-earnings ratio = Market price per share ÷ Earnings per share

= $5.34 ÷ $0.30 = 17.80

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
135. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The dividend payout ratio for Year 2 is closest to:

A. 50.0
%
B. 28.6
%
C. 33.3
%
 D. 3333.3
%

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Dividends per share = Common dividends ÷ Common shares

= $20 ÷ 200 shares = $0.10 per share

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding
= ($70 - $10) ÷ (200 shares + 200 shares)/2 = $0.30 per share

Dividend payout ratio = Dividends per share ÷ Earnings per share

= $0.10 per share ÷ $0.30 per share = 33.3%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
136. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The dividend yield ratio for Year 2 is closest to:

A. 2.81
%
B. 66.67
%
C. 1.87
%
 D. 0.94
%

Number of common shares outstanding = Common stock ÷ Par value

= $400 ÷ $2 per share = 200 shares

Dividends per share = Common dividends ÷ Common shares

= $20 ÷ 200 shares = $0.10 per share

Dividend yield ratio = Dividends per share ÷ Market price per share
= $0.10 per share ÷ $5.34 per share = 1.87%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
137. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The return on total assets for Year 2 is closest to:

A. 5.74
%
B. 7.46
%
C. 7.40
%
 D. 5.79
%

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]

= $70 + [$29 × (1 - 0.30)] = $90.3

Average total assets = ($1,220 + $1,200) ÷ 2 = $1,210

Return on total assets = Adjusted net income ÷ Average total assets

= $90.3 ÷ $1,210 = 7.46%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
138. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The return on common stockholders' equity for Year 2 is closest to:

A. 8.70
%
B. 10.17
%
C. 10.14
%
 D. 11.86
%

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity
= ($70 - $10) ÷ $590* = 10.17%
*Average common stockholders' equity = ($610 + $570) ÷ 2 = $590

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
139. Excerpts from Goodrow Corporation's most recent balance sheet and
income statement appear below:

Dividends on common stock during Year 2 totaled $20 thousand.

Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.34 per share.

The book value per share at the end of Year 2 is closest to:

A. $0.3
0
B. $3.0
5
C. $6.1
0
 D. $3.5
5

Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding = $610 ÷ 200 shares* = $3.05 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
140. Financial statements for Marcell Company appear below:
 Marcell Company's working capital (in thousands of dollars) at the end
of Year 2 was closest to:

A. $47
0
B. $2
0
C. $52
0
D. $1,24
0

Working capital = Current assets - Current liabilities = $470 - $450 =

$20

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
141. Financial statements for Marcell Company appear below:
 Marcell Company's current ratio at the end of Year 2 was closest to:

A. 1.0
4
B. 0.4
2
C. 0.4
8
D. 1.2
2

Current ratio = Current assets ÷ Current liabilities = $470 ÷ $450 =

1.04

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
142. Financial statements for Marcell Company appear below:
 Marcell Company's acid-test ratio at the end of Year 2 was closest to:

A. 0.3
3
B. 1.3
5
C. 0.6
0
D. 0.7
4

Acid-test ratio = Quick assets* ÷ Current liabilities = $270 ÷ $450 =

0.60
*Quick assets = Cash + Marketable securities + Accounts receivable +
Short-term notes receivable
= $160 + $0 + $110 = $270

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
143. Financial statements for Marcell Company appear below:
 Marcell Company's accounts receivable turnover for Year 2 was closest
to:

A. 16.
2
B. 9.
9
C. 23.
2
D. 14.
2

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $2,550 ÷ $110* = 23.2
*Average accounts receivable balance = ($110 + $110) ÷ 2 = $110

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
144. Financial statements for Marcell Company appear below:
 Marcell Company's average collection period for Year 2 was closest to:

A. 22.6
days
B. 15.7
days
C. 25.8
days
D. 36.9
days

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $2,550 ÷ $110* = 23.2
*Average accounts receivable balance = ($110 + $110) ÷ 2 = $110

Average collection period = 365 days ÷ Accounts receivable turnover

(see above)
= 365 days ÷ 23.2 = 15.7 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
145. Financial statements for Marcell Company appear below:
 Marcell Company's inventory turnover for Year 2 was closest to:

A. 16.
2
B. 23.
2
C. 14.
2
D. 9.
9

Inventory turnover = Cost of goods sold ÷ Average inventory balance =

$1,780 ÷ $180* = 9.9
*Average inventory balance = ($180 + $180) ÷ 2 = $180

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
146. Financial statements for Marcell Company appear below:
 Marcell Company's average sale period for Year 2 was closest to:

A. 15.7
days
B. 25.8
days
C. 36.9
days
D. 22.6
days

Inventory turnover = Cost of goods sold ÷ Average inventory balance =

$1,780 ÷ $180* = 9.9
*Average inventory balance = ($180 + $180) ÷ 2 = $180

Average sale period = 365 days ÷ Inventory turnover (see above) =

365 days ÷ 9.9 = 36.9 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
147. Selected financial data for Bragg Company appear below:

Bragg Company's inventory turnover ratio for Year 2 was closest to:

A. 2.0
0
B. 2.6
7
C. 4.8
0
D. 4.0
0

Inventory turnover = Cost of goods sold ÷ Average inventory balance =

$80,000 ÷ $30,000* = 2.67
*Average inventory balance = ($40,000 + $20,000) ÷ 2 = $30,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
148. Selected financial data for Bragg Company appear below:

Suppose that 45% of Bragg Company's total sales are cash sales. The
company's average collection period (age of receivables) for Year 2 was
closest to:

A. 44.24
days
B. 54.07
days
C. 36.05
days
D. 29.49
days

Sales on account = 55% × $180,000 = $99,000

Average accounts receivable balance = ($8,000 + $16,000) ÷ 2 =

$12,000

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $99,000 ÷ $12,000 = 8.25

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 8.25 = 44.24 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
149. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The working capital at the end of Year 2 is:

A. $970
thousand
B. $570
thousand
C. $280
thousand
D. $810
thousand

Working capital = Current assets - Current liabilities = $570 - $290 =

$280 thousand

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
150. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The current ratio at the end of Year 2 is closest to:

A. 1.9
7
B. 0.7
2
C. 0.3
0
D. 0.4
1

Current ratio = Current assets ÷ Current liabilities = $570 ÷ $290 =

1.97

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
151. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The acid-test ratio at the end of Year 2 is closest to:

A. 1.6
9
B. 1.9
7
C. 1.3
9
D. 1.5
2

Acid-test ratio = Quick assets ÷ Current liabilities = $440* ÷ $290 =

1.52
*Quick assets = Cash + Marketable securities + Accounts receivable +
Short-term notes receivable
= $280 + $0 + $160 = $440

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
152. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The accounts receivable turnover for Year 2 is closest to:

A. 1.1
4
B. 8.1
9
C. 0.8
8
D. 8.7
3

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,310 ÷ $150* = 8.73
*Average accounts receivable balance = ($160 + $140) ÷ 2 = $150

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
153. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The average collection period for Year 2 is closest to:

A. 1.1
days
B. 0.9
days
C. 41.8
days
D. 44.6
days

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,310 ÷ $150* = 8.73
*Average accounts receivable balance = ($160 + $140) ÷ 2 = $150

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 8.73 = 41.8 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
154. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The inventory turnover for Year 2 is closest to:

A. 1.2
5
B. 9.8
9
C. 11.1
3
D. 0.8
0

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $890 ÷ $90* = 9.89
*Average inventory balance = ($80 + $100) ÷ 2 = $90

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
155. Dieringer Corporation's most recent balance sheet and income
statement appear below:
 The average sale period for Year 2 is closest to:

A. 36.9
days
B. 248.0
days
C. 22.3
days
D. 32.8
days

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $890 ÷ $90* = 9.89
*Average inventory balance = ($80 + $100) ÷ 2 = $90

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 9.89 = 36.9 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
156. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The working capital at the end of Year 2 is:

A. $63
0
B. $81
0
C. $68
0
D. $42
0

Working capital = Current assets - Current liabilities = $680 - $260 =

$420

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
157. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The current ratio at the end of Year 2 is closest to:

A. 0.3
8
B. 2.6
2
C. 0.5
2
D. 0.7
4

Current ratio = Current assets ÷ Current liabilities = $680 ÷ $260 =

2.62

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
158. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The acid-test ratio at the end of Year 2 is closest to:

A. 1.8
1
B. 2.6
2
C. 1.6
9
D. 1.3
6

Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= $240 + $0 + $200 = $440

Acid-test ratio = Quick assets ÷ Current liabilities

= $440 ÷ $260 = 1.69

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
 Topic: Ratio Analysis—The Short-Term Creditor

159. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The accounts receivable turnover for Year 2 is closest to:

A. 6.8
5
B. 0.8
7
C. 1.1
5
D. 6.3
7

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,370 ÷ $215* = 6.37
*Average accounts receivable balance = ($200 + $230) ÷ 2 = $215

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
160. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The average collection period for Year 2 is closest to:

A. 57.3
days
B. 53.3
days
C. 0.9
days
D. 1.2
days

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,370 ÷ $215* = 6.37
*Average accounts receivable balance = ($200 + $230) ÷ 2 = $215

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 6.37 = 57.3 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
 Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

161. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The inventory turnover for Year 2 is closest to:

A. 4.0
5
B. 4.3
6
C. 1.1
7
D. 0.8
6

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $850 ÷ $195* = 4.36
*Average inventory balance = ($210 + $180) ÷ 2 = $195

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
162. Excerpts from Zorra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,370 and the cost of goods

sold was $850.

The average sale period for Year 2 is closest to:

A. 55.9
days
B. 90.1
days
C. 83.7
days
D. 226.5
days

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $850 ÷ $195* = 4.36
*Average inventory balance = ($210 + $180) ÷ 2 = $195

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 4.36 = 83.7 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
 Topic: Ratio Analysis—The Short-Term Creditor

163. Excerpts from Tigner Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The working capital at the end of Year 2 is:

A. $74
0
B. $79
0
C. $43
0
D. $15
0

Working capital = Current assets - Current liabilities

= $430 thousand - $280 thousand = $150 thousand

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
164. Excerpts from Tigner Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The current ratio at the end of Year 2 is closest to:

A. 1.1
2
B. 1.5
4
C. 0.3
5
D. 1.0
0

Current ratio = Current assets ÷ Current liabilities = $430 ÷ $280 =

1.54

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
165. Excerpts from Tigner Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The acid-test ratio at the end of Year 2 is closest to:

A. 1.1
8
B. 1.5
5
C. 1.0
0
D. 0.9
6

Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= $120 + $0 + $150 = $270

Acid-test ratio = Quick assets ÷ Current liabilities = $270 ÷ $280 =

0.96

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
 Topic: Ratio Analysis—The Short-Term Creditor

166. Excerpts from Tigner Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The accounts receivable turnover for Year 2 is closest to:

A. 7.1
0
B. 0.9
1
C. 8.7
9
D. 1.1
0

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,230 ÷ $140* = 8.79
*Average accounts receivable balance = ($150 + $130) ÷ 2 = $140

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
167. Excerpts from Tigner Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,230 and the cost of goods

sold was $820.

The inventory turnover for Year 2 is closest to:

A. 0.8
6
B. 1.1
7
C. 6.3
1
D. 6.8
3

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $820 ÷ $130* = 6.31
*Average inventory balance = ($120 + $140) ÷ 2 = $130

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
168. Data from Kooistra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The working capital at the end of Year 2 is:

A. $99
0
B. $17
0
C. $1,01
0
D. $45
0

Working capital = Current assets - Current liabilities = $450 - $280 =

$170

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
169. Data from Kooistra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The current ratio at the end of Year 2 is closest to:

A. 0.9
6
B. 0.3
0
C. 0.3
1
D. 1.6
1

Current ratio = Current assets ÷ Current liabilities = $450 ÷ $280 =

1.61

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
170. Data from Kooistra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The acid-test ratio at the end of Year 2 is closest to:

A. 0.7
5
B. 1.6
1
C. 0.9
6
D. 1.0
5

Quick assets = Cash + Marketable securities + Accounts receivable +

Short-term notes receivable
= $70 + $0 + $140 = $210

Acid-test ratio = Quick assets ÷ Current liabilities = $210 ÷ $280 =

0.75

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
 Topic: Ratio Analysis—The Short-Term Creditor

171. Data from Kooistra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The average collection period for Year 2 is closest to:

A. 0.9
days
B. 38.8
days
C. 40.2
days
D. 1.1
days

Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= $1,270 ÷ $135* = 9.41
*Average accounts receivable balance = ($140 + $130) ÷ 2 = $135

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 9.41 = 38.8 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
 Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

172. Data from Kooistra Corporation's most recent balance sheet appear
below:

Sales on account in Year 2 amounted to $1,270 and the cost of goods

sold was $770.

The average sale period for Year 2 is closest to:

A. 51.7
days
B. 221.3
days
C. 78.2
days
D. 85.3
days

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $770 ÷ $165* = 4.67
*Average inventory balance = ($180 + $150) ÷ 2 = $165

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 4.67 = 78.2 days

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
173. Financial statements for Narita Company appear below:
 Narita Company's times interest earned for Year 2 was closest to:

A. 14.
7
B. 26.
0
C. 10.
3
D. 15.
7

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $470 ÷ $30 = 15.7

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
174. Financial statements for Narita Company appear below:
 Narita Company's debt-to-equity ratio at the end of Year 2 was closest
to:

A. 0.1
7
B. 0.5
8
C. 0.2
5
D. 0.4
2

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $640 ÷

$1,540 = 0.42

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
175. Mclaughlin Corporation's most recent balance sheet and income
statement appear below:
 The times interest earned for Year 2 is closest to:

A. 2.7
3
B. 4.9
1
C. 7.0
1
D. 3.9
1

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $162 ÷ $33 = 4.91

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
176. Mclaughlin Corporation's most recent balance sheet and income
statement appear below:
 The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.6
9
B. 0.4
0
C. 0.3
5
D. 0.9
3

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $540 ÷

$780 = 0.69

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
177. Data from Kempen Corporation's most recent balance sheet and the
company's income statement appear below:

The times interest earned for Year 2 is closest to:

A. 3.4
5
B. 6.3
6
C. 4.4
5
D. 2.4
2

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense
= $147 ÷ $33 = 4.45
 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
178. Data from Kempen Corporation's most recent balance sheet and the
company's income statement appear below:

The debt-to-equity ratio at the end of Year 2 is closest to:

A. 0.7
1
B. 0.3
3
C. 0.2
4
D. 0.5
7

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $550 ÷

$970 = 0.57

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor

Essay Questions
179. Lundberg Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $50 thousand.
Dividends on preferred stock totaled $20 thousand. The market price of
common stock at the end of Year 2 was $9.36 per share.

Required:

Compute the following for Year 2:

a. Gross margin percentage.

b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
a. Gross margin percentage = Gross margin ÷ Sales = $480 ÷ $1,330
= 36.1%

b. Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding*
= ($110 - $20) ÷ (100 shares + 100 shares)/2 = $0.90 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $100 ÷ $1 per share = 100 shares

c. Price-earnings ratio = Market price per share ÷ Earnings per share

(see above)
= $9.36 ÷ $0.90 = 10.4

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share

(see above)
= $0.50 ÷ $0.90 = 55.6%
*Dividends per share = Common dividends ÷ Common shares (see
above)
= $50 ÷ 100 shares = $0.50 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market

price per share
= $0.50 ÷ $9.36 = 5.34%

f. Return on total assets = Adjusted net income* ÷ Average total

assets**
= $131.7 ÷ $1,335 = 9.87%
*Adjusted net income = Net income + [Interest expense × (1 - Tax
rate)]
= $110 + [$31 × (1 - 0.30)] = $131.7
**Average total assets = ($1,330 + $1,340) ÷ 2 = $1,335

g. Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders'
equity*
= ($110 - $20) ÷ $610 = 14.75%
*Average common stockholders' equity = ($630 + $590) ÷ 2 = $610

h. Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding* = $630 ÷ 100 shares = $6.30 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $100 ÷ $1 per share = 100 shares

i. Working capital = Current assets - Current liabilities = $430 - $310 =

$120 thousand

j. Current ratio = Current assets ÷ Current liabilities = $430 ÷ $310 =

1.39

k. Acid-test ratio = Quick assets* ÷ Current liabilities = $310 ÷ $310 =

1.00
*Quick assets = Cash + Marketable securities + Accounts receivable +
Short-term notes receivable
= $100 + $0 + $210 = $310

l. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance*
= $1,330 ÷ $215 = 6.19
*Average accounts receivable balance = ($210 + $220) ÷ 2 = $215

m. Average collection period = 365 days ÷ Accounts receivable

turnover (see above)
= 365 days ÷ 6.19 = 59.0 days

n. Inventory turnover = Cost of goods sold ÷ Average inventory

balance* = $850 ÷ $115 = 7.39
*Average inventory balance = ($110 + $120) ÷ 2 = $115

o. Average sale period = 365 days ÷ Inventory turnover (see above) =

365 days ÷ 7.39 = 49.4 days

p. Times interest earned = Earnings before interest expense and

income taxes ÷ Interest expense = $188 ÷ $31 = 6.06

q. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $500

÷ $830 = 0.60
 AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
Topic: Statements in Comparative and Common-Size Form
180. Guedea Corporation's most recent balance sheet and income statement
appear below:
Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $5.22 per share.

Required:

Compute the following for Year 2:

a. Gross margin percentage.

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

a. Gross margin percentage = Gross margin ÷ Sales = $540 ÷ $1,310

= 41.2%

b. Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding*
= ($100 - $10) ÷ (200 shares + 200 shares)/2 = $0.45 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares
c. Price-earnings ratio = Market price per share ÷ Earnings per share
(see above)
= $5.22 ÷ $0.45 = 11.6

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share

(see above)
= $0.20 ÷ $0.45 = 44.4%
*Dividends per share = Common dividends ÷ Common shares (see
above)
= $40 ÷ 200 shares = $0.20 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market

price per share
= $0.20 ÷ $5.22 = 3.83%

f. Return on total assets = Adjusted net income* ÷ Average total

assets**
= $125.9 ÷ $1,575 = 7.99%
*Adjusted net income = Net income + [Interest expense × (1 - Tax
rate)]
= $100 + [$37 × (1 - 0.30)] = $125.9
**Average total assets = ($1,580 + $1,570) ÷ 2 = $1,575

g. Return on common stockholders' equity = (Net income - Preferred

dividends) ÷ Average common stockholders' equity* = ($100 - $10) ÷
$785 = 11.46%
*Average common stockholders' equity = ($810 + $760) ÷ 2 = $785

h. Book value per share = Common stockholders' equity÷ Number of

common shares outstanding*
= $810 ÷ 200 shares = $4.05 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
 Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
Topic: Statements in Comparative and Common-Size Form

181. Tubergen Corporation's most recent income statement appears below:

Required:

Compute the gross margin percentage.

Gross margin percentage = Gross margin ÷ Sales = $518,000 ÷

$928,000 = 55.8%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-01 Prepare and interpret financial statements in comparative and common-size form.
Topic: Statements in Comparative and Common-Size Form
182. Financial statements for Pracht Company appear below:
Dividends during Year 2 totaled $62 thousand, of which $15 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $160.

Required:

Compute the following for Year 2:

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 ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average
number of common shares outstanding* = ($182 - $15) ÷ 14 = $11.93
*Number of common shares outstanding = Common stock ÷ Par value
= $140 ÷ $10 = 14

b. Price-earnings ratio = Market price per share ÷ Earnings per share

(see above)
= $160 ÷ $11.93 = 13.4

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share

(see above)
= $3.36 ÷ $11.93 = 28.1%

*Dividends per share = Common dividends ÷ Common shares** = $47

÷ 14 = $3.36
**See above

d. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $3.36 ÷ $160.00
= 2.10% *See above

e. Return on total assets = Adjusted net income* ÷ Average total

assets** = $217 ÷ $2,340 = 9.27%
*Adjusted net income = Net income + [Interest expense × (1 - Tax
rate)]
= $182 + [$50 × (1 - 0.30)] = $217
**Average total assets = ($2,390 + $2,290) ÷ 2 = $2,340

f. Return on common stockholders' equity = (Net income - Preferred

dividends) ÷
Average common stockholders' equity*
= ($182 - $15) ÷ $1,400 = 11.93%
*Average common stockholders' equity = ($1,460 + $1,340) ÷ 2 =
$1,400

g. Book value per share = Common stockholders' equity ÷ Number of

common shares outstanding*
= $1,460 ÷ 14 = $104.29
*Number of common shares outstanding = Common stock ÷ Par value
= $140 ÷ $10 = 14

h. Working capital = Current assets - Current liabilities = $510 - $340 =

$170

i. Current ratio = Current assets ÷ Current liabilities = $510 ÷ $340 =

1.50

j. Acid-test ratio = Quick assets* ÷ Current liabilities = $310 ÷ $340 =

0.91
*Quick assets = Cash + Marketable securities + Accounts receivable +
Short-term notes receivable
= $180 + $130 = $310

k. Average accounts receivable balance = ($130 + $100) ÷ 2 = $115

Accounts receivable turnover = Sales on account ÷ Average accounts
receivable balance
= $1,700 ÷ $115 = 14.78

l. Average collection period = 365 days ÷ Accounts receivable

turnover*
= 365 ÷ 14.78 = 24.7 days

m. Average inventory balance = ($150 + $160) ÷ 2 = $155

Inventory turnover = Cost of goods sold ÷ Average inventory balance =
$1,190 ÷ $155 = 7.68

n. Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 7.68

= 47.5 days

o. Times interest earned = Earnings before interest expense and

income taxes ÷ Interest expense = $310 ÷ $50 = 6.20

p. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $830

÷ $1,560 = 0.53

AACSB: Analytic
AICPA BB: Critical Thinking
 AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
183. Condensed financial statements for Blackhurst Company appear below:

There were 72,000 shares of common stock outstanding throughout the

year. Dividends on common stock amounted to $320,400 and dividends
on preferred stock amounted to $45,000. The market value of a share
of common stock was $54 at the end of the year.

Required:

On the basis of the information given above, fill in the blanks with the
appropriate figures:

Example: The gross margin as a percent of sales would be computed by

dividing $2,160,000 by $5,400,000.

a. The earnings per share of common stock for the year would be
computed by dividing _______________ by _________________.

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

dividing _______________ by _________________.

c. The price-earnings ratio at the end of the year would be computed by

dividing _______________ by _________________.

d. The dividend payout ratio for the year would be computed by

dividing _______________ by _________________.

e. The dividend yield ratio for the year would be computed by dividing
_______________ by _________________.

f. The return on total assets 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 acid-test ratio at the end of the year would be computed by

dividing _______________ by _________________.

i. The accounts receivable turnover for the year would be computed by

dividing _______________ by _________________.

j. The inventory turnover for the year would be computed by dividing

_______________ by _________________.
k. The debt-to-equity ratio at the end of the year would be computed by
dividing _______________ by _________________.

a. Earnings per share = (Net income - Preferred dividends) ÷ Average

number of common shares outstanding = $704,000 ÷ 72,000 shares

b. The times interest earned = (Net operating income - Interest

expense) ÷ Interest expense = $1,150,000 ÷ $80,000

c. Price-earnings ratio = Market price ÷ Earnings per share = $54 ÷

$9.78

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share**

= $4.45 ÷ $9.78
*Dividends per share = $320,400 ÷ 72,000 = $4.45
**Earnings per share = (Net income - Preferred dividends) ÷ Average
number of common shares outstanding = $704,000 ÷ 72,000 shares =
$9.78 per share

e. Dividend yield ratio = Dividends per share ÷ Earnings per share =

$4.45 ÷ $54

f. Return on total assets = {Net income + [Interest expense × (1 - Tax

rate)]} ÷ Average total assets
= [$749,000 + $80,000 × (1 - .30)] ÷ ($4,133,000 + $3,832,000)/2
= $805,000 ÷ $3,982,500

g. Return on common stockholders' equity = (Net income - Preferred

dividends) ÷ (Average total stockholders' equity - Average preferred
stock)
= ($749,000 - $45,000) ÷ ($1,800,000 + $685,000 + $1,800,000 +
$301,400)/2
= $704,000 ÷ $2,293,200

h. Acid-test ratio = (Cash + Marketable securities + Accounts

receivable + Short-term notes receivable) ÷ Current liabilities
= ($128,000 + $472,000) ÷ $198,000
 = $600,000 ÷ $198,000

i. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable balance
= ($5,400,000 × .90) ÷ [($472,000 + $438,000)/2]
= $4,860,000 ÷ $455,000

j. Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $3,240,000 ÷ [($797,000 + $673,000)/2]
= $3,240,000 ÷ $735,000

k. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= ($198,000 + $1,000,000) ÷ ($450,000 + $1,800,000 + $685,000)
= $1,198,000 ÷ $2,935,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
184. Condensed financial statements for Pardin Company are given below:
The company paid total dividends of $100,000 during the year. At the
end of Year 2, the company's common stock was selling for $38 per
share.

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 Year 2 would be computed by

dividing $1,080,000 by $400,000.

a. The acid-test ratio at the end of Year 2 would be computed by

dividing _______________ by _________________.

b. The accounts receivable turnover during Year 2 would be computed

by dividing _______________ by _________________.

c. The inventory turnover during Year 2 would be computed by dividing

_______________ by _________________.

d. The times interest earned for Year 2 would be computed by dividing

_______________ by _________________.

e. The earnings per share of common stock for Year 2 would be

computed by dividing _______________ by _________________.

f. The return on total assets for Year 2 would be computed by dividing

_______________ by _________________.

g. The debt-to-equity ratio at the end of Year 2 would be computed by

dividing _______________ by _________________.

h. The dividend yield ratio would be computed by dividing

_______________ by _________________.

i. The return on common stockholders' equity for Year 2 would be

computed by dividing _______________ by _________________.
 j. Whether the common stockholders gained or lost from the use of
financial leverage during Year 2 would be determined by comparing the
ratio computed in question ___ above to the ratio computed in question
above ____. In this case, financial leverage is (positive/negative)
___________________.

a. $480,000; $400,000
b. $2,600,000; $400,000
c. $1,400,000; $500,000
d. $450,000; $50,000
e. $220,000; 40,000 shares
f. $270,000; $2,100,000
g. $700,000; $1,500,000
h. $2.50; $38
i. $220,000; $1,230,000
j. f; i; positive

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
185. Bedrosian Incorporated has a line of credit from the Belmont National
Bank that is due to be renewed on February 1. The bank has requested
the company's current Income Statement and Comparative Statements
of Financial Position which appear below.
The bank has also requested that Bedrosian calculate a number of
financial ratios. Bedrosian's financial ratios have not yet been
calculated for this year, but the company's accounting staff has
gathered the following industry averages for the ratios from various
sources.
Required:

a. Calculate the following financial ratios for this year for Bedrosian
Incorporated.

1. Return on total assets.

2. Return on common stockholders' equity.
3. Current ratio.
4. Acid-test ratio.
5. Debt-to-equity ratio.
6. Times interest earned.
7. Dividend payout ratio.

b. By comparing the ratios calculated in Requirement A with the

industry ratios, evaluate Bedrosian's operations.

a. The financial ratios are calculated as follows.

1. Return on total assets = {Net income + [Interest expense × (1 - Tax

rate)]} ÷ Average total assets
Tax rate = $3,600/$9,000 = 40%
Average total assets = ($40,500 + $38,250)/2 = $39,375
Return on total assets = {$5,400 + [$1,500 × (1 - 0.4)]}/$39,375 =
16%
2. Return on common stockholders' equity = (Net income - Preferred
dividends) ÷ (Average total stockholders' equity - Average preferred
stock)
Average common stockholders' equity = ($19,500 + $16,275)/2 =
 $17,887.50
Return on common stockholders' equity = ($5,400 - $0)/$17,887.50 =
30.2%
3. Current ratio = Current assets ÷ Current liabilities = $10,800/$9,000
= 1.2
4. Acid-test ratio = (Cash + Marketable securities + Accounts
receivable + Short-term notes receivable) ÷ Current liabilities =
($1,950 + $3,600 + $0) ÷ $9,000 = $5,550 ÷ $9,000 = 0.62
5. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity
= $21,000 ÷ $19,500 = 1.08
6. Times interest earned = Earnings before interest expense and
income taxes ÷ Interest expense
= ($9,000 + $1,500) ÷ $1,500 = $10,500 ÷ $1,500 = 7
7. Dividend payout ratio = Dividends per share ÷ Earnings per share
= $3.86 ÷ $8.18 = 47.2%

b. A comparison of Bedrosian's ratios with industry ratios indicates that

Bedrosian generates a higher than average return on both assets and
equity. Its debt-to-equity ratio is lower than the industry average
indicating some capacity to incur more debt. However, the company's
current ratio, acid-test ratio, and times interest earned are lower than
average which may indicate a higher than average credit risk for a
creditor in the short term. Also, the higher dividend payout ratio
indicates a high cash outflow which could aggravate Bedrosian's
liquidity position.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Source: CMA, adapted
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
186. Renbud Computer Services Co. (RCS) specializes in customized software
development for the broadcast and telecommunications industries. The
company was started by three people in 1973 to develop software
primarily for a national network to be used in broadcasting national
election results. After sustained and manageable growth for many
years, the company has grown very fast over the last three years,
doubling in size.

This growth has placed the company in a challenging financial position.

Within thirty days, RCS will need to renew its $300,000 loan with the
Third State Bank of San Marcos. This loan is classified as a current
liability on RCS's balance sheet. Harvey Renbud, president of RCS, is
concerned about renewing the loan. The bank has requested RCS's
most recent financial statements which appear below, including
balance sheets for this year and last year. The bank has also requested
four ratios relating to operating performance and liquidity.
Required:

a. Explain why the Third State Bank of San Marcos would be interested
in reviewing Renbud Computer Services Co.'s comparative financial
statements and its financial ratios before renewing the loan.

b. Calculate the following financial ratios for Renbud Computer Services

Co:

1. The current ratio for both this year and last year.
2. Accounts receivable turnover for this year.
3. Return on common stockholders' equity for this year.
4. The debt-to-equity ratio for both this year and last year.

c. Discuss briefly the limitations and difficulties that can be

encountered in using ratio analysis.

a. The Third State Bank would be interested in comparative financial

statements so that it could analyze trends in data and operating
results. Trends are important because they may point to basic changes
in the nature of the business. Ratio analysis would give some indication
of the company's short-term solvency and help Third State Bank assess
the level of risk involved in the loan. The ratios would also be useful in
analyzing how RCS is performing compared to industry averages, and
thus serve as a benchmark for comparison to other companies. Ratios
reduce absolute dollar amounts to more meaningful data in order for
the bank to compare ratios to prior periods, other companies, and the
industry. Ratios can be used to show how well the company is being
managed and to highlight areas for further investigation. If the ratios do
not appear favorable compared to the company's own past and to other
companies in its industry, the bank may consider adjusting the dollar
level and/or the interest rate of the note or may even decide not to
renew the note.

b. Calculations of selected financial ratios are presented below.

1. Current ratio = Current assets ÷ Current liabilities

This Year
Current assets = $50 + $350 + $70 = $470
Current liabilities = $150 + $140 + $300 = $590
Current assets =
Current ratio = Current assets ÷ Current liabilities = $470 ÷ $590 =
0.80
Last Year
Current assets = $50 + $250 + $160 = $460
Current liabilities = $130 + $120 + $200 = $450
Current ratio = $460 ÷ $450 = 1.02

2. Accounts receivable turnover = Sales on account ÷ Average

accounts receivable balance
= $2,500 ÷ ($350 + $250)/2 = $2,500 ÷ $300 = 8.33
 3. Return on common stockholders' equity = (Net income - Preferred
dividends) ÷ (Average total stockholders' equity - Average preferred
stock)
= ($290 - $0) ÷ (($940 + $710)/2 - $0) = $290 ÷ $825 = 35.15%

4. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

This Year
Debt-to-equity ratio = $990 ÷ $940 = 1.05
Last Year
Debt-to-equity ratio = $850 ÷ $710 = 1.20

c. The difficulties and limitations of ratio analysis include the following:

• Although ratios are useful as a starting point in financial analysis,

they are not an end in themselves. Ratios can be used as indicators of
what to pursue in a more detailed analysis.
• Different companies often use different accounting methods (e.g.,
FIFO versus LIFO inventory valuation) and this can have an impact on
the financial ratios that does not reflect real differences in the
operations and financial health of the companies.
• Making comparisons across industries can be difficult. Companies in
different industries tend to have different financial ratios.
• Since the ratios are based on accounting statements, they measure
what has happened in the past and not necessarily what will happen in
the future.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Source: CMA, adapted
Topic: Ratio Analysis—The Common Stockholder
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
187. Recent financial statements for Madison Company are given below:
Madison Company paid dividends of $3.15 per share during the year.
The company's common stock had a market price of $63 per share on
December 31. Assets at the beginning of the year totaled $1,100,000
and stockholders' equity totaled $725,000.

Required:

Compute the following:

a. Earnings per share of common stock.

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

a. Earnings per share = (Net income - Preferred dividends) ÷ Average

number of common shares outstanding = ($105,000 - $0) ÷ 20,000 =
$5.25/share

b. Dividend payout ratio = Dividends per share ÷ Earnings per share =

$3.15 ÷ $5.25 = 60%

c. Dividend yield ratio = Dividends paid per share ÷ Market price per
 share = $3.15 ÷ $63.00 = 5%

d. Price-earnings ratio = Market price per share ÷ Earnings per share =

$63.00 ÷ $5.25 = 12.0

e. Return on total assets = [Net income + Interest expense × (1 - Tax

rate)] ÷ Average total assets
= [$105,000 + $30,000 × (1-.40)] ÷ [$1,100,000 + $1,300,000)] =
$123,000 ÷ $1,200,000 = 10.25%

f. Return on common stockholders' equity = (Net income - Preferred

dividends) ÷ Average common stockholders' equity = ($105,000 - $0)
÷ [1/2 × ($725,000 + $800,000)] = $105,000 ÷ $762,500 = 13.8%

g. Financial leverage is positive since the rate of return to the common

stockholders of 13.8% is greater than the rate of return on total assets
of 10.25%.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
188. Financial statements for Qualle Company appear below:
Dividends during Year 2 totaled $149 thousand, of which $10 thousand
were preferred dividends.
The market price of a share of common stock on December 31, Year 2
was $280.

Required:

Compute the following for Year 2:

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.

a. Number of common shares outstanding = Common stock ÷ Par value

= $160 ÷ $10 = 16
Earnings per share = (Net Income - Preferred Dividends) ÷ Average
number of common shares outstanding = ($259 - $10) ÷ 16 = $15.56

b. Price-earnings ratio = Market price per share ÷ Earnings per share

(see above)
= $280 ÷ $15.56 = 18.0
 c. Number of common shares outstanding = Common stock ÷ Par value
= $160 ÷ $10 = 16
Dividends per share = Common dividends ÷ Common shares = $139 ÷
16 = $8.69
Dividend yield ratio = Dividends per share ÷ Market price per share =
$8.69 ÷ $280.00 = 3.10%

d. Average total assets = ($2,330 + $2,300) ÷ 2 = $2,315

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $259 + [$50 × (1 - 0.30)] = $294
Return on total assets = Adjusted net income ÷ Average total assets =
$294 ÷ $2,315
= 12.70%

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

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

f. Number of common shares outstanding = Common stock ÷ Par value

= $160 ÷ $10 = 16
Book value per share = Common stockholders' equity ÷ Number of
common shares outstanding
= $1,340 ÷ 16 = $83.75

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
189. Debutiaco Corporation's most recent balance sheet and income
statement appear below:
Dividends on common stock during Year 2 totaled $20 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of
common stock at the end of Year 2 was $12.00 per share.

Required:

Compute the following for Year 2:

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.

a. Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $2 per share = 100 shares
Earnings per share = (Net Income - Preferred Dividends) ÷ Average
number of common shares outstanding = ($70 - $10) ÷ (100 shares +
100 shares)/2 = $0.60 per share

b. Price-earnings ratio = Market price per share ÷ Earnings per share

(see above)
 = $12.00 ÷ $0.60 = 20.0

c. Dividends per share = Common dividends ÷ Common shares (see

above)
= $20 ÷ 100 shares = $0.20 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share (see
above)
= $0.20 ÷ $0.60 = 33.3%

d. Dividend yield ratio = Dividends per share (see above) ÷ Market

price per share
= $0.20 ÷ $12.00 = 1.67%

e. Average total assets = ($1,620 + $1,630) ÷ 2 = $1,625

Adjusted net income = Net income + [Interest expense × (1 - Tax rate)]
= $70 + [$29 × (1 - 0.30)] = $90.3
Return on total assets = Adjusted net income ÷ Average total assets
= $90.3 ÷ $1,625 = 5.56%

f. Average common stockholders' equity = ($1,110 + $1,070) ÷ 2 =

$1,090
Return on common stockholders' equity = (Net income - Preferred
dividends) ÷ Average common stockholders' equity = ($70 - $10) ÷
$1,090 = 5.50%

g. Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $2 per share = 100 shares
Book value per share = Common stockholders' equity ÷ Number of
common shares outstanding
= $1,110 ÷ 100 shares = $11.10 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
190. Sweetman Corporation has provided the following financial data (in
thousands of dollars):

Net income for Year 2 was $120 thousand. Interest expense was $25
thousand. The tax rate was 30%. Dividends on common stock during
Year 2 totaled $80 thousand. Dividends on preferred stock totaled $20
thousand. The market price of common stock at the end of Year 2 was
$4.75 per share.

Required:

Compute the following for Year 2:

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.

a. Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 per share = 200 shares
Earnings per share = (Net Income - Preferred Dividends) ÷ Average
number of common shares outstanding
= ($120 - $20) ÷ (200 shares + 200 shares)/2 = $0.50 per share

b. Price-earnings ratio = Market price per share ÷ Earnings per share

(see above)
 = $4.75 ÷ $0.50 = 9.5

c. Dividends per share = Common dividends ÷ Common shares (see

above)
= $80 ÷ 200 shares = $0.40 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share (see
above)
= $0.40 ÷ $0.50 = 80.0%

d. Dividend yield ratio = Dividends per share (see above) ÷ Market

price per share
= $0.40 ÷ $4.75 = 8.42%

e. Average total assets = ($1,310 + $1,290) ÷ 2 = $1,300

Return on total assets = {Net income + [Interest expense × (1 - Tax
rate)]} ÷ Average total assets
= {$120 + [$25 × (1 - 0.30)]} ÷ $1,300
= $137.5 ÷ $1,300 = 10.58%

f. Average common stockholders' equity = ($710 + $690) ÷ 2 = $700

Return on common stockholders' equity = (Net income - Preferred
dividends) ÷ Average common stockholders' equity = ($120 - $20) ÷
$700 = 14.29%

g. Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 per share = 200 shares
Book value per share = (Total stockholders' equity - Preferred stock) ÷
Number of common shares outstanding = ($200 + $160 + $350) ÷ 200
shares = $3.55 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
191. Lunghofer Corporation's net income for the most recent year was
$3,189,000. A total of 300,000 shares of common stock and 100,000
shares of preferred stock were outstanding throughout the year.
Dividends on common stock were $4.90 per share and dividends on
preferred stock were $1.95 per share.

Required:

Compute the earnings per share of common stock. Show your work!

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding = ($3,189,000 - $195,000) ÷
300,000 shares = $9.98 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
192. Basta Corporation's net income last year was $1,401,000. The dividend
on common stock was $1.00 per share and the dividend on preferred
stock was $3.90 per share. The market price of common stock at the
end of the year was $65.40 per share. Throughout the year, 300,000
shares of common stock and 100,000 shares of preferred stock were
outstanding.

Required:

Compute the price-earnings ratio. Show your work!

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding = ($1,401,000 - $390,000) ÷
300,000 shares = $3.37 per share
Price-earnings ratio = Market price per share ÷ Earnings per share =
$65.40 ÷ $3.37 = 19.41

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
193. Sabb Corporation's net income last year was $6,190,000. The dividend
on common stock was $13.90 per share and the dividend on preferred
stock was $1.60 per share. The market price of common stock at the
end of the year was $41.50 per share. Throughout the year, 300,000
shares of common stock and 100,000 shares of preferred stock were
outstanding.

Required:

Compute the dividend payout ratio. Show your work!

Earnings per share = (Net Income - Preferred Dividends) ÷ Average

number of common shares outstanding = ($6,190,000 - $160,000) ÷
300,000 shares = $20.10 per share
Dividend payout ratio = Dividends per share ÷ Earnings per share =
$13.90 ÷ $20.10 = 0.69

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

194. Last year, Bickham Corporation's dividend on common stock was $8.70
per share and the dividend on preferred stock was $3.80 per share. The
market price of common stock at the end of the year was $66.10 per
share.

Required:

Compute the dividend yield ratio. Show your work!

Dividend yield ratio = Dividends per share ÷ Market price per share =
$8.70 ÷ $66.10 = 0.13

AACSB: Analytic
 AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder

195. Gulick Corporation's most recent income statement appears below:

The beginning balance of total assets was $320,000 and the ending
balance was $280,000.

Required:

Compute the return on total assets. Show your work!

Average total assets = ($320,000 + $280,000) ÷ 2 = $300,000

Return on total assets = {Net income + [Interest expense × (1 - Tax
rate)]} ÷ Average total assets
= {$56,000 + [$10,000 × (1 - 0.30))]} ÷ $300,000
= $63,000 ÷ $300,000 = 21.0%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
196. Excerpts from Ruden Corporation's most recent balance sheet appear
below:

Net income for Year 2 was $102,000. Dividends on common stock were
$47,000 in total and dividends on preferred stock were $15,000 in total.

Required:

Compute the return on common stockholders' equity. Show your work!

Average common stockholders' equity = ($1,320,000 + $1,280,000) ÷

2 = $1,300,000
Return on common stockholders' equity = (Net income - Preferred
dividends) ÷ Average common stockholders' equity = ($102,000 -
$15,000) ÷ $1,300,000 = 6.7%

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
197. Data from Paynter Corporation's most recent balance sheet appear
below:

A total of 100,000 shares of common stock and 20,000 shares of

preferred stock were outstanding at the end of the year.

Required:

Compute the book value per share. Show your work!

Book value per share = (Total stockholders' equity - Preferred stock) ÷

Number of common shares outstanding = ($840,000 + $0) ÷ 100,000
shares = $8.40 per share

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-02 Compute and interpret financial ratios that would be useful to a common stockholder.
Topic: Ratio Analysis—The Common Stockholder
198. Financial statements for Rarig Company appear below:
Required:

Compute the following for Year 2:

a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.

a. Current ratio = Current assets ÷ Current liabilities = $590 ÷ $310 =

1.90

b. Acid-test ratio = (Cash + Marketable securities + Accounts

receivable + Short-term notes receivable) ÷ Current liabilities = ($210
+ $160 + $0) ÷ $310 = $370 ÷ $310 = 1.19

c. Average accounts receivable balance = ($160 + $150) ÷ 2 = $155

Accounts receivable turnover = Sales on account ÷ Average accounts
receivable balance
= $1,800 ÷ $155 = 11.61
Average collection period = 365 days ÷ Accounts receivable turnover =
 365 ÷ 11.61 = 31.4 days

d. Average inventory balance = ($190 + $180) ÷ 2 = $185

Inventory turnover = Cost of goods sold ÷ Average inventory balance =
$1,260 ÷ $185 = 6.81

e. Times interest earned = Earnings before interest expense and

income taxes ÷ Interest expense = $330 ÷ $50 = 6.60

f. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $770 ÷

$1,320 = 0.58

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
Topic: Ratio Analysis—The Short-Term Creditor
199. Malbrough Corporation's most recent balance sheet and income
statement appear below:
Required:

Compute the following for Year 2:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.

a. Working capital = Current assets - Current liabilities = $500 - $270 =

$230

b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $270 =

1.85

c. Acid-test ratio = (Cash + Marketable securities + Accounts receivable

+ Short-term notes receivable) ÷ Current liabilities = ($110 + $0 +
$140) ÷ $270 = $250 ÷ $270 = 0.93

d. Average accounts receivable balance = ($140 + $140) ÷ 2 = $140

Accounts receivable turnover = Sales on account ÷ Average accounts
receivable balance
 = $1,290 ÷ $140 = 9.21

e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 9.21 = 39.6 days

f. Average inventory balance = ($180 + $170) ÷ 2 = $175

Inventory turnover = Cost of goods sold ÷ Average inventory balance =
$740 ÷ $175 = 4.23

g. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 4.23 = 86.3 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
200. Excerpts from Stepney Corporation's most recent balance sheet (in
thousands of dollars) appear below:

Sales on account during the year totaled $1,440 thousand. Cost of

goods sold was $890 thousand.

Required:

Compute the following for Year 2:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.

a. Working capital = Current assets - Current liabilities = $720 - $360 =

$360

b. Current ratio = Current assets ÷ Current liabilities = $720 ÷ $360 =

2.00
 c. Acid-test ratio = (Cash + Marketable securities + Accounts receivable
+ Short-term notes receivable) ÷ Current liabilities = ($260 + $0 +
$260 = $520) ÷ $360 = $520 ÷ $360 = 1.44

d. Average accounts receivable balance = ($260 + $270) ÷ 2 = $265

Accounts receivable turnover = Sales on account ÷ Average accounts
receivable balance
= $1,440 ÷ $265 = 5.43

e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.43 = 67.2 days

f. Average inventory balance = ($140 + $140) ÷ 2 = $140

Inventory turnover = Cost of goods sold ÷ Average inventory balance =
$890 ÷ $140 = 6.36

g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 6.36 = 57.4 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
201. Heningburg Corporation's total current assets are $230,000, its
noncurrent assets are $530,000, its total current liabilities are
$140,000, its long-term liabilities are $370,000, and its stockholders'
equity is $250,000.

Required:

Compute the company's working capital. Show your work!

Working capital = Current assets - Current liabilities = $230,000 -

$140,000 = $90,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor

202. Gaskamp Corporation's total current assets are $270,000, its

noncurrent assets are $610,000, its total current liabilities are
$170,000, its long-term liabilities are $400,000, and its stockholders'
equity is $310,000.

Required:

Compute the company's current ratio. Show your work!

Current ratio = Current assets ÷ Current liabilities = $270,000 ÷

$170,000 = 1.59

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
203. Data from Weichbrodt Corporation's most recent balance sheet appear
below:

Required:

Compute the company's acid-test ratio. Show your work!

Acid-test ratio = (Cash + Marketable securities + Accounts receivable +

Short-term notes receivable) ÷ Current liabilities = ($15,000 + $26,000
+ $37,000) ÷ $102,000 = $78,000 ÷ $102,000 = 0.76

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
204. Millage Corporation has provided the following data:

Required:

Compute the accounts receivable turnover for this year. Show your
work!

Average accounts receivable balance = ($145,000 + $125,000) ÷ 2 =

$135,000
Accounts receivable turnover = Sales on account ÷ Average accounts
receivable balance
= $721,000 ÷ $135,000 = 5.34

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
205. Data from Adame Corporation's most recent balance sheet and income
statement appear below:

Required:

Compute the average collection period for this year:

Average accounts receivable balance = ($107,000 + $116,000) ÷ 2 =

$111,500
Accounts receivable turnover = Sales on account ÷ Average accounts
receivable balance
= $799,000 ÷ $111,500 = 7.17
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 7.17 = 50.9 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
206. Eaglen Corporation has provided the following data:

Required:

Compute the inventory turnover for this year:

Average inventory balance = ($152,000 + $155,000) ÷ 2 = $153,500

Inventory turnover = Cost of goods sold ÷ Average inventory balance =
$530,000 ÷ $153,500 = 3.45

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
207. Data from Ankeny Corporation's most recent balance sheet and income
statement appear below:

Required:

Compute the average sale period for this year:

Average inventory balance = ($188,000 + $175,000) ÷ 2 = $181,500

Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $641,000 ÷ $181,500 = 3.53
Average sale period = 365 days ÷ Inventory turnover = 365 days ÷
3.53 = 103.4 days

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-03 Compute and interpret financial ratios that would be useful to a short-term creditor.
Topic: Ratio Analysis—The Short-Term Creditor
208. Zide Corporation's most recent balance sheet and income statement
appear below:
 Required:

Compute the following for Year 2:

a. Times interest earned.

b. Debt-to-equity ratio.

a. Times interest earned = Earnings before interest expense and

income taxes ÷ Interest expense = $83 ÷ $19 = 4.37
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity = $400
÷ $1,070 = 0.37

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
209. Pettengill Corporation's net operating income last year was $280,000;
its interest expense was $37,000; its total stockholders' equity was
$920,000; and its total liabilities were $620,000.

Required:

Compute the following for Year 2:

a. Times interest earned.

b. Debt-to-equity ratio.

a. Times interest earned = Earnings before interest expense and

income taxes ÷ Interest expense = $280,000 ÷ $37,000 = 7.57
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity =
$620,000 ÷ $920,000 = 0.67

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
210. Dehne Corporation has provided the following data from its most recent
income statement:

Required:

Compute the times interest earned ratio. Show your work!

Times interest earned = Earnings before interest expense and income

taxes ÷ Interest expense = $75,000 ÷ $32,000 = 2.34

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor
211. Schiff Corporation has provided the following data from its most recent
balance sheet:

Required:

Compute the debt-to-equity ratio. Show your work!

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity =

$500,000 ÷ $160,000 = 3.13

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 13-04 Compute and interpret financial ratios that would be useful to a long-term creditor.
Topic: Ratio Analysis—The Long-Term Creditor