Chapter 16 “How Well Am I Doing?

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Financial Statement Analysis
True/False Questions

1. Common-size statements are financial statements of companies of similar size.

Ans: False

2. One limitation of vertical analysis is that it cannot be used to compare two companies
that are significantly different in size.

Ans: False

3. The gross margin percentage is computed by dividing the gross margin by total assets.

Ans: False

4. The sale of used equipment at book value for cash will increase earnings per share.

Ans: False

5. Earnings per share is computed by dividing net income (after deducting preferred
dividends) by the average number of common shares outstanding.

Ans: True

6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings
ratio.

Ans: True

7. An increase in the number of shares of common stock outstanding will decrease a

company's price-earnings ratio if the market price per share remains unchanged.

Ans: False
 8. A company's financial leverage is negative when its return on total assets is less than
its return on common stockholders' equity.

Ans: False

9. When computing return on common stockholders' equity, retained earnings should be

included as part of common stockholders' equity.

Ans: True

10. When a retailing company purchases inventory, the book value per share of the
company increases.

Ans: False

11. If a company's acid-test ratio increases, its current ratio will also increase.

Ans: True

12. Assuming a current ratio greater than 1, acquiring land by issuing more of the
company's common stock will increase the current ratio.

Ans: False

13. If a company successfully implements lean production, its inventory turnover ratio
should decrease.

Ans: False

14. Short-term borrowing is not a source of working capital.

Ans: True
 15. Working capital is computed by subtracting long-term liabilities from long-term
assets.

Ans: False

Multiple Choice Questions

16. Common size financial statements help an analyst to:

A) Evaluate financial statements of companies within a given industry of the
approximate same size.
B) Determine which companies in a similar industry are at approximately the same
stage of development.
C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over a period of time or between companies within a given industry
without respect to size.
D) Ascertain the relative potential of companies of similar size in different
industries.

Ans: C Source: CMA, adapted

17. Which of the following ratios would be least useful in determining a company's ability
to pay its expenses and liabilities?
A) current ratio
B) acid-test ratio
C) price-earnings ratio
D) times interest earned ratio

Ans: C LO: 2,3,4

18. Most stockholders would ordinarily be least concerned with which of the following
ratios:
A) earnings per share.
B) dividend yield ratio.
C) price-earnings ratio.
D) acid-test ratio.

Ans: D LO: 2,3

19. What effect will the issuance of common stock for cash at year-end have on the
following ratios?

Return on Total Assets Debt-to-Equity Ratio

A) Increase Increase
B) Increase Decrease
C) Decrease Increase
D) Decrease Decrease

Ans: D LO: 2,4

20. The market price of Friden Company's common stock increased from $15 to $18.
Earnings per share of common stock remained unchanged. The company's price-
earnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.

Ans: A

21. If a company is profitable and is effectively using leverage, which

one of the following ratios is likely to be the largest?
A) Return on total assets.
B) Return on total liabilities.
C) Return on common stockholders' equity.
D) Cannot be determined.

Ans: C

22. Clark Company issued bonds with an interest rate of 10%. The company's return on
assets is 12%. The company's return on common stockholders' equity would most
likely:
A) increase.
B) decrease.
C) remain unchanged.
D) cannot be determined.

Ans: A
23. Which of the following transactions could generate positive financial leverage for a
corporation?
A) acquiring assets through the issuance of long-term debt.
B) acquiring assets through the use of accounts payable.
C) acquiring assets through the issuance of common stock.
D) both A and B above

Ans: D

24. Book value per common share is the amount of stockholders' equity per outstanding
share of common stock. Which one of the following statements about book value per
common share is most correct?
A) Market price per common share usually approximates book value per common
share.
B) Book value per common share is based on past transactions whereas the market
price of a share of stock mainly reflects what investors expect to happen in the
future.
C) A market price per common share that is greater than book value per common
share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders
if the company were sold to another company.

Ans: B Source: CMA, adapted

25. The ratio of total cash, marketable securities, accounts receivable, and short-term
notes to current liabilities is:
A) the debt-to-equity ratio.
B) the current ratio.
C) the acid-test ratio.
D) working capital.

Ans: C LO: 3,4

26. A company has just converted a long-term note receivable into a short-term note
receivable. The company's acid-test and current ratios are both greater than 1. This
transaction will:
A) increase the current ratio and decrease the acid-test ratio.
B) increase the current ratio and increase the acid-test ratio.
C) decrease the current ratio and increase the acid-test ratio.
D) decrease the current ratio and decrease the acid-test ratio.

Ans: B

27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will
increase Broca's current ratio?
A) the purchase of inventory for cash.
B) the collection of an account receivable.
C) the payment of an account payable.
D) none of the above.

Ans: C

28. Allen Company's average collection period for accounts receivable was 25 days in
year 1, but increased to 40 days in year 2. Which of the following would most likely
be the cause of this change:
A) a decrease in accounts receivable relative to sales in year 2.
B) an increase in credit sales in year 2 as compared to year 1.
C) a relaxation of credit policies in year 2.
D) a decrease in accounts receivable in year 2 as compared to year 1.

Ans: C

29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory
turnover ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.

Ans: A
30. Gottlob Corporation's most recent income statement appears below:

Sales (all on account) ................................ $824,000

Cost of goods sold ..................................... 477,000
Gross margin ............................................. 347,000
Selling and administrative expense ........... 208,000
Net operating income ................................ 139,000
Interest expense ......................................... 37,000
Net income before taxes ............................ 102,000
Income taxes .............................................. 30,000
Net income ................................................ $ 72,000

The gross margin percentage is closest to:

A) 20.7%
B) 72.7%
C) 42.1%
D) 481.9%

Ans: C

Solution:

Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1%

31. Crandall Company's net income last year was $60,000. The company paid preferred
dividends of $10,000 and its average common stockholders' equity was $480,000. The
company's return on common stockholders' equity for the year was closest to:
A) 12.5%
B) 10.4%
C) 2.1%
D) 14.6%

Ans: B

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity
= ($60,000 − $10,000) ÷ $480,000 = 10.4%
32. Ardor Company's net income last year was $500,000. The company has 150,000
shares of common stock and 30,000 shares of preferred stock outstanding. There was
no change in the number of common or preferred shares outstanding during the year.
The company declared and paid dividends last year of $1.00 per share on the common
stock and $0.70 per share on the preferred stock. The earnings per share of common
stock is closest to:
A) $3.33
B) $3.19
C) $2.33
D) $3.47

Ans: B

Solution:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding
= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2]
= $3.19 per share

33. The following information relates to Konbu Corporation for last year:

Price earnings ratio............ 15

Dividend payout ratio........ 30%
Earnings per share ............. $5

What is Konbu's dividend yield ratio for last year?

A) 1.5%
B) 2.0%
C) 4.5%
D) 10.0%

Ans: B
 Solution:

Dividend yield ratio = Dividends per share* ÷ Market price per share **
= $0.06 ÷ $3 = 2.0%
* Dividends per share = Dividend payout ratio ÷ Earnings per share
= 30% ÷ $5 = $0.06 per share
** Market price per share = Price earnings ratio ÷ Earnings per share
= 15 ÷ $5 = $3 per share

34. Richmond Company has 100,000 shares of $10 par value common stock issued and
outstanding. Total stockholders' equity is $2,800,000 and net income for the year is
$800,000. During the year Richmond paid $3.00 per share in dividends on its common
stock. The market value of Richmond's common stock is $24. What is the price-
earnings ratio?
A) 3.0
B) 3.5
C) 4.8
D) 8.0

Ans: A Source: CPA, adapted

Solution:

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

= $24 ÷ $8 = 3.0
* Earnings per share = (Net income - Preferred dividends) ÷ Average # of common
shares outstanding
= ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share

35. Hurst Company has 20,000 shares of common stock outstanding. These shares were
originally issued at a price of $15 per share. The current book value is $25.00 per
share and the current market value is $30.00 per share. The dividends on common
stock for the year totaled $45,000. The dividend yield ratio is:
A) 9%
B) 7.5%
C) 15%
D) 10%

Ans: B
 Solution:

Dividend yield ratio = Dividends per share ÷ Market price per share
= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%

36. Bramble Company's net income last year was $65,000 and its interest expense was
$15,000. Total assets at the beginning of the year were $620,000 and total assets at the
end of the year were $650,000. The company's income tax rate was 40%. The
company's return on total assets for the year was closest to:
A) 11.7%
B) 10.2%
C) 12.6%
D) 11.2%

Ans: A

Solution:

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

= $74,000 ÷ $635,000 = 11.7%
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $65,000 + 15,000 × (1 − 0.40) = $74,000
**Average total assets = ($620,000 + $650,000) ÷ 2 = $635,000

37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%,
its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn
$70,000 per year before interest and taxes on a new investment of $500,000, then it
will be better off by $25,000 per year.
A) The company's reasoning is correct.
B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.
C) The company's reasoning is not correct, since interest is not tax-deductible.
D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.

Ans: D
38. Bucatini Corporation is contemplating the expansion of operations. This expansion
will generate a 11% return on the funds invested. To finance this operation, Bucatini
can either issue 12% bonds, issue 12% preferred stock, or issue common stock.
Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax
rate is 30%. In which of the financing options above is positive financial leverage
being generated?
A) none of the options generate positive financial leverage
B) the bonds
C) the common stock
D) the preferred stock

Ans: B

39. Consolo Corporation's net income for the most recent year was $809,000. A total of
100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $2.05 per share
and dividends on preferred stock were $1.80 per share. The earnings per share of
common stock is closest to:
A) $2.44
B) $8.09
C) $4.49
D) $6.04

Ans: C

Solution:

Earnings per share = (Net Income - Preferred Dividends)

÷ Average number of common shares outstanding
= [$809,000 − (200,000 × $1.80)] ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $4.49
40. Bary Corporation's net income last year was $2,604,000. The dividend on common
stock was $2.50 per share and the dividend on preferred stock was $2.40 per share.
The market price of common stock at the end of the year was $73.50 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) 9.33
B) 11.89
C) 13.66
D) 8.47

Ans: A

Solution:

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

= $73.50 ÷ $7.88 = 9.33
* Earnings per share = (Net income − Preferred dividends) ÷ Average number of
common shares outstanding
= [$2,604,000 − (100,000 × $2.40)] ÷ [(300,000 shares + 300,000 shares) ÷ 2] = $7.88

41. Arntson Corporation's net income last year was $7,975,000. The dividend on common
stock was $8.20 per share and the dividend on preferred stock was $3.50 per share.
The market price of common stock at the end of the year was $59.10 per share.
Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred
stock were outstanding. The dividend payout ratio is closest to:
A) 1.06
B) 0.51
C) 0.56
D) 1.29

Ans: C

Solution:

Dividend payout ratio = Dividends per share ÷ Earnings per share*

= $8.20 ÷ $14.55 = 0.56
* Earnings per share = (Net income − Preferred dividends) ÷ Average number of
common shares outstanding
= [$7,975,000 − (200,000 × $3.50)] ÷ [(500,000 shares + 500,000 shares) ÷ 2] =
$14.55
42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and
the dividend on preferred stock was $1.10 per share. The market price of common
stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:
A) 0.02
B) 0.21
C) 0.23
D) 0.91

Ans: B

Solution:

Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $11.60 ÷ $54.80 = 0.21

43. Inglish Corporation's most recent income statement appears below:

Sales (all on account) ................................ $610,000

Cost of goods sold ..................................... 350,000
Gross margin ............................................. 260,000
Selling and administrative expense ........... 110,000
Net operating income ................................ 150,000
Interest expense ......................................... 30,000
Net income before taxes ............................ 120,000
Income taxes (30%) ................................... 36,000
Net income ................................................ $ 84,000

The beginning balance of total assets was $560,000 and the ending balance was
$580,000. The return on total assets is closest to:
A) 18.4%
B) 14.7%
C) 26.3%
D) 21.1%

Ans: A
 Solution:

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

= $105,000 ÷ $570,000 = 18.4%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $84,000 + [$30,000 × (1 − 0.30)] = $105,000
**Average total assets = ($560,000 + $580,000) ÷ 2 = $570,000

44. Excerpts from Bellis Corporation's most recent balance sheet appear below:

Year 2 Year 1
Preferred stock ................................................. $ 100,000 $ 100,000
Common stock ................................................. 300,000 300,000
Additional paid-in capital–common stock ...... 370,000 370,000
Retained earnings ............................................ 480,000 390,000
Total stockholders’ equity ............................... $1,250,000 $1,160,000

Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in
total and dividends on preferred stock were $23,000 in total. The return on common
stockholders' equity for Year 2 is closest to:
A) 9.4%
B) 13.3%
C) 12.4%
D) 14.5%

Ans: C

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity*
= ($160,000 − $23,000) ÷ $1,105,000 = 12.4%
*Average common stockholders' equity = ($1,060,000 + $1,150,000) ÷ 2 = $1,105,000
45. Data from Baca Corporation's most recent balance sheet appear below:

Preferred stock ................................................. $ 100,000

Common stock ................................................. 400,000
Additional paid-in capital–common stock ...... 360,000
Retained earnings ............................................ 580,000
Total stockholders’ equity ............................... $1,440,000

A total of 400,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A) $3.35
B) $5.00
C) $1.90
D) $3.60

Ans: A

Solution:

Book value per share= Common stockholders' equity ÷ Number of common shares
outstanding* = $1,340,000 ÷ 400,000 shares = $3.35 per share

46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000.
The company's current ratio is closest to:
A) 0.88
B) 0.12
C) 9.40
D) 1.12

Ans: D

Solution:

Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 =

1.12
47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in
accounts receivable, $20,000 in inventories, and $30,000 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) 1.57
B) 0.90
C) 1.33
D) 2.23

Ans: A

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $47,000 ÷ $30,000 = 1.57

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $13,000 + $7,000 + $27,000 = $47,000

48. Frame 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
$16,000. The company's accounts receivable turnover was closest to:
A) 12.31
B) 6.15
C) 16.00
D) 10.00

Ans: A

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$160,000 ÷ $13,000 = 12.31
*Average accounts receivable = ($10,000 + $16,000) ÷ 2 = $13,000
49. Graber Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $18,000 and the ending accounts receivable balance was
$12,000. The company's average collection period was closest to:
A) 33.69 days
B) 42.12 days
C) 84.23 days
D) 50.54 days

Ans: B

Solution:

Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 days ÷ 8.6667 = 42.12 days
* Accounts receivable turnover = Sales on account ÷ Average accounts receivable
balance
= $130,000 ÷ [($18,000 + $12,000) ÷ 2] = 8.6667

50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The
beginning inventory balance was $20,000 and the ending inventory balance was
$26,000. The company's inventory turnover was closest to:
A) 5.65
B) 10.00
C) 13.00
D) 11.30

Ans: D

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory*

= $260,000 ÷ $23,000 = 11.30
*Average inventory = ($20,000 + $26,000) ÷ 2 = $23,000
51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
inventory balance was $26,000 and the ending inventory balance was $24,000. The
company's average sale period was closest to:
A) 114.06 days
B) 54.75 days
C) 59.31 days
D) 57.03 days

Ans: D

Solution:

Average sale period = 365 days ÷ Inventory turnover*

= 365 days ÷ 6.4 = 57.03 days
* Inventory turnover = Cost of goods sold ÷ Average inventory
= $160,000 ÷ [($26,000 + $24,000) ÷ 2] = 6.4

52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are
$660,000, its total current liabilities are $220,000, its long-term liabilities are
$410,000, and its stockholders' equity is $400,000. Working capital is:
A) $370,000
B) $150,000
C) $250,000
D) $400,000

Ans: B

Solution:

Working capital = Current assets − Current liabilities = $370,000 − $220,000

= $150,000
53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are
$630,000, its total current liabilities are $230,000, its long-term liabilities are
$290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A)
0.62
A) 0.59
B) 1.70
C) 0.79

Ans: C

Solution:

Current ratio = Current assets ÷ Current liabilities = $390,000 ÷ $230,000 = 1.70

54. Data from Hollingworth Corporation's most recent balance sheet appear below:

Cash ................................... $12,000

Marketable securities ......... $29,000
Accounts receivable .......... $37,000
Inventory ........................... $51,000
Prepaid expenses ............... $20,000
Current liabilities ............... $115,000

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

A) 0.85
B) 0.10
C) 0.68
D) 0.36

Ans: C

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $78,000 ÷ $115,000 = 0.68

* Quick assets = Cash + Marketable securities + Accounts receivable
= $12,000 + $29,000 + $37,000 = $78,000
55. Eachus Corporation has provided the following data:

This Year Last Year

Accounts receivable .......... $135,000 $119,000
Inventory ........................... $136,000 $155,000
Sales on account ................ $698,000
Cost of goods sold ............. $429,000

The accounts receivable turnover for this year is closest to:

A) 0.88
B) 5.50
C) 5.17
D) 1.13

Ans: B

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$698,000 ÷ $127,000 = 5.50

*Average accounts receivable = ($135,000 + $119,000) ÷ 2 = $127,000

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

This Year Last Year

Accounts receivable .......... $101,000 $125,000
Inventory ........................... $183,000 $190,000
Sales on account ................ $758,000
Cost of goods sold ............. $457,000

The average collection period for this year is closest to:

A) 48.7 days
B) 70.6 days
C) 85.6 days
D) 54.4 days

Ans: D
 Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$758,000 ÷ $113,000 = 6.71

*Average accounts receivable = ($101,000 + $125,000) ÷ 2 = $113,000

Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 ÷ 6.71 = 54.4 days
*See above

57. Laware Corporation has provided the following data:

This Year Last Year

Accounts receivable .......... $118,000 $138,000
Inventory ........................... $180,000 $170,000
Sales on account ................ $714,000
Cost of goods sold ............. $447,000

The inventory turnover for this year is closest to:

A) 2.55
B) 0.94
C) 2.48
D) 1.06

Ans: A

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $447,000 ÷ $175,000

= 2.55

*Average inventory = ($170,000 + $180,000) ÷ 2 = $175,000

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

This Year Last Year

Accounts receivable .......... $101,000 $125,000
Inventory ........................... $155,000 $153,000
Sales on account ................ $662,000
Cost of goods sold ............. $399,000

The average sale period for this year is closest to:

A) 142.0 days
B) 3.6 days
C) 140.9 days
D) 3.7 days

Ans: C

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $399,000 ÷ $154,000

= 2.59

*Average inventory = ($153,000 + $155,000) ÷ 2 = $154,000

Average sale period = 365 days ÷ Inventory turnover* = 365 ÷ 2.59

= 140.9 days
*See above

59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to:
A) 10.20
B) 14.50
C) 15.50
D) 18.80

Ans: D

Solution:

Times interest earned = Net operating income ÷ Interest expense

= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80
60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for
the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax
net income must be:
A) $60,000
B) $42,000
C) $31,500
D) $16,500

Ans: C

Solution:

Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense
4.0 = (Before-tax income + $15,000) ÷ $15,000
$60,000 = Earnings before income taxes + $15,000
Earnings before income taxes = $45,000
After-tax net income = Earnings before income taxes × (1 − Tax rate)
= $45,000 × (1 − 0.30) = $31,500

61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The
company's debt-to-equity ratio is closest to:
A) 0.28
B) 0.72
C) 0.42
D) 2.60

Ans: D

Solution:

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

= $130,000 ÷ ($180,000 - $130,000) = 2.60
62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and
long term liabilities total $200,000. Brewster Company's total assets must be:
A) $375,000
B) $450,000
C) $550,000
D) $675,000

Ans: D

Solution:

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

= ($100,000 + $200,000) ÷ Stockholders' equity = 0.8
Stockholders' equity = $300,000 ÷ 0.8 = $375,000
Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000
= $675,000

63. Boyington Corporation has provided the following data from its most recent income
statement:

Net operating income ........ $87,000

Interest expense ................. $49,000
Net income before taxes .... $38,000
Income taxes ...................... $11,000
Net income ........................ $27,000

The times interest earned ratio is closest to:

A) 0.55
B) 0.78
C) 2.54
D) 1.78

Ans: D

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $87,000 ÷ $49,000 = 1.78
64. Wohlfarth Corporation has provided the following data from its most recent balance
sheet:

Total assets .................................... $760,000

Total liabilities ............................... $570,000
Total stockholders’ equity ............. $190,000

The debt-to-equity ratio is closest to:

A) 4.00
B) 3.00
C) 0.75
D) 0.33

Ans: B

Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $570,000 ÷ $190,000

= 3.00
Use the following to answer questions 65-81:

Gschwend Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash .................................................................... $ 140 $ 130
Accounts receivable ........................................... 160 140
Inventory ............................................................ 170 150
Prepaid expenses ................................................ 90 90
Total current assets ................................................ 560 510
Plant and equipment, net ....................................... 840 900
Total assets ............................................................ $1,400 $1,410

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 150 $ 150
Accrued liabilities .............................................. 60 60
Notes payable, short term................................... 60 60
Total current liabilities .......................................... 270 270
Bonds payable ....................................................... 230 270
Total liabilities ...................................................... 500 540
Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. 200 200
Common stock, $1 par value.............................. 100 100
Additional paid-in capital–common stock ......... 100 100
Retained earnings ............................................... 500 470
Total stockholders’ equity ..................................... 900 870
Total liabilities & stockholders’ equity ................. $1,400 $1,410
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,370
Cost of goods sold ................................................. 800
Gross margin ......................................................... 570
Selling and administrative expense ....................... 439
Net operating income ............................................ 131
Interest expense ..................................................... 31
Net income before taxes ........................................ 100
Income taxes (30%) ............................................... 30
Net income ............................................................ $ 70

Dividends on common stock during Year 2 totaled $30 thousand. Dividends on preferred
stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $4.86
per share.

65. The gross margin percentage for Year 2 is closest to:

A) 814.3%
B) 71.3%
C) 41.6%
D) 12.3%

Ans: C

Solution:

Gross margin percentage = Gross margin ÷ Sales = $570 ÷ $1,370 = 41.6%

66. The earnings per share of common stock for Year 2 is closest to:
A) $0.60
B) $0.70
C) $1.00
D) $1.31

Ans: A
 Solution:

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

Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60

*Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 = 100

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

A) 8.10
B) 3.71
C) 6.94
D) 4.86

Ans: A

Solution:

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

Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60

*Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 = 100

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

= $4.86 ÷ $0.60 = 8.10

68. The dividend payout ratio for Year 2 is closest to:

A) 66.7%
B) 50.0%
C) 833.3%
D) 42.9%

Ans: B
 Solution:

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

Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60

*Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 = 100

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.30 ÷ $0.60 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $30 ÷ 100 shares = $0.30 per share

69. The dividend yield ratio for Year 2 is closest to:

A) 75.00%
B) 8.23%
C) 2.06%
D) 6.17%

Ans: D

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60

*Number of common shares outstanding = Common stock ÷ Par value

= $100 ÷ $1 = 100

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.30 ÷ $0.60 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $30 ÷ 100 shares = $0.30 per share

Dividend yield ratio = Dividends per share ÷ Market price per share = $0.30 ÷ $4.86 =
6.17%
70. The return on total assets for Year 2 is closest to:
A) 5.00%
B) 6.55%
C) 6.53%
D) 4.98%

Ans: C

Solution:

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

= $91.70 ÷ $1,405 = 6.53%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $70 + [$31 × (1 − 0.30)] = $91.70
**Average total assets = ($1,410 + $1,400) ÷ 2 = $1,405

71. The return on common stockholders' equity for Year 2 is closest to:
A) 6.78%
B) 7.91%
C) 8.76%
D) 10.22%

Ans: C

Solution:

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders' equity*
= ($70 − $10) ÷ $685 = 8.76%
*Average common stockholders' equity
= [($870 - $200) + ($900 − $200)] ÷ 2 = $685
72. The book value per share at the end of Year 2 is closest to:
A) $0.60
B) $7.00
C) $9.00
D) $14.00

Ans: B

Solution:

Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $100 ÷ $1 per share = 100 shares

73. The working capital at the end of Year 2 is:

A) $840 thousand
B) $560 thousand
C) $290 thousand
D) $900 thousand

Ans: C

Solution:

Working capital = Current assets - Current liabilities = $560 thousand − $270

thousand = $290 thousand

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

A) 0.36
B) 0.40
C) 0.89
D) 2.07

Ans: D

Solution:

Current ratio = Current assets ÷ Current liabilities = $560 ÷ $270 = 2.07

75. The acid-test ratio at the end of Year 2 is closest to:
A) 1.11
B) 1.12
C) 2.07
D) 1.44

Ans: A

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $270 = 1.11

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $140 + $0 + $160 = $300

76. The accounts receivable turnover for Year 2 is closest to:

A) 1.14
B) 8.56
C) 0.88
D) 9.13

Ans: D

Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =
$1,370 ÷ $150 = 9.13
*Average accounts receivable = ($140 + $160) ÷ 2 = $150

77. The average collection period for Year 2 is closest to:

A) 1.1 days
B) 42.6 days
C) 0.9 days
D) 40.0 days

Ans: D
 Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,370 ÷ $150 = 9.13
*Average accounts receivable = ($140 + $160) ÷ 2 = $150

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 9.13 = 40.0 days

78. The inventory turnover for Year 2 is closest to:

A) 4.71
B) 0.88
C) 5.00
D) 1.13

Ans: C

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00
*Average inventory = ($150 + $170) ÷ 2 = $160

79. The average sale period for Year 2 is closest to:

A) 45.3 days
B) 77.5 days
C) 213.1 days
D) 73.0 days

Ans: D

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $800 ÷ $160 = 5.00
*Average inventory = ($150 + $170) ÷ 2 = $160

Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.00 = 73.0 days
80. The times interest earned for Year 2 is closest to:
A) 4.23
B) 6.04
C) 2.26
D) 3.23

Ans: A

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $131 ÷ $31 = 4.23

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

A) 0.71
B) 0.26
C) 0.56
D) 0.32

Ans: C

Solution:

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

= $500 ÷ $900 = 0.56
Use the following to answer questions 82-89:

Orgeron Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash .............................................................. $ 260 $ 120
Accounts receivable ..................................... 160 190
Inventory ...................................................... 180 160
Prepaid expenses .......................................... 60 70
Total current assets .......................................... 660 540
Plant and equipment, net ................................. 680 750
Total assets ...................................................... $1,340 $1,290

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ......................................... $ 170 $ 150
Accrued liabilities ........................................ 40 40
Notes payable, short term............................. 80 90
Total current liabilities .................................... 290 280
Bonds payable ................................................. 290 300
Total liabilities ................................................ 580 580
Stockholders’ equity:
Preferred stock, $100 par value, 5% ............... 100 100
Common stock, $2 par value........................ 200 200
Additional paid-in capital–common stock ... 100 100
Retained earnings ......................................... 360 310
Total stockholders’ equity ............................... 760 710
Total liabilities & stockholders’ equity ........... $1,340 $1,290
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ...................................... $1,260
Cost of goods sold ........................................... 800
Gross margin ................................................... 460
Selling and administrative expense ................. 272
Net operating income ...................................... 188
Interest expense ............................................... 38
Net income before taxes .................................. 150
Income taxes (30%) ......................................... 45
Net income ...................................................... $ 105

Dividends on common stock during Year 2 totaled $50 thousand. Dividends on preferred
stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.30
per share.

82. The gross margin percentage for Year 2 is closest to:

A) 57.5%
B) 22.8%
C) 438.1%
D) 36.5%

Ans: D

Solution:

Gross margin percentage = Gross margin ÷ Sales = $460 ÷ $1,260 = 36.5%

83. The earnings per share of common stock for Year 2 is closest to:
A) $1.05
B) $1.88
C) $1.50
D) $1.00

Ans: D
 Solution:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares

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

A) 11.30
B) 10.76
C) 7.53
D) 6.01

Ans: A

Solution:

Earnings per share = (Net Income - Preferred Dividends)

÷ Average number of common shares outstanding*
= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Price-earnings ratio = Market price per share ÷ Earnings per share
= $11.30 ÷ $1.00 = 11.30
85. The dividend payout ratio for Year 2 is closest to:
A) 47.6%
B) 55.0%
C) 50.0%
D) 500.0%

Ans: C

Solution:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.50 ÷ $1.00 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $50 ÷ 100 shares = $0.50 per share

86. The dividend yield ratio for Year 2 is closest to:

A) 4.42%
B) 0.45%
C) 90.91%
D) 4.87%

Ans: A

Solution:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares
Dividend payout ratio = Dividends per share* ÷ Earnings per share
= $0.50 ÷ $1.00 = 50.0%
*Dividends per share = Common dividends ÷ Common shares
= $50 ÷ 100 shares = $0.50 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30
= 4.42%
87. The return on total assets for Year 2 is closest to:
A) 10.01%
B) 7.98%
C) 7.84%
D) 9.82%

Ans: A

Solution:

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

= $131.60 ÷ $1,315 = 10.01%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $105 + [$38 × (1 − 0.30)] = $131.60
**Average total assets = ($1,290 + $1,340) ÷ 2 = $1,315

88. The return on common stockholders' equity for Year 2 is closest to:
A) 15.75%
B) 16.54%
C) 13.61%
D) 14.29%

Ans: A

Solution:

Return on common stockholders' equity

= (Net income − Preferred dividends) ÷ Average common stockholders' equity*
= ($105 − $5) ÷ $635 = 15.75%
*Average common stockholders' equity = ($610 + $660) ÷ 2 = $635
 89. The book value per share at the end of Year 2 is closest to:
A) $1.00
B) $7.60
C) $13.40
D) $6.60

Ans: D

Solution:

Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares

Use the following to answer questions 90-92:

Payne Company's sales and current assets have been reported as follows over the last four
years:

Year 4 Year 3 Year 2 Year 1

Sales .................................. $810,000 $720,000 $630,000 $600,000

Cash ................................... $ 36,000 $ 30,000 $ 25,000 $ 20,000

Accounts receivable .......... 74,000 60,000 59,200 50,000
Inventory ........................... 77,800 72,000 90,000 80,000
Prepaid expenses ............... 46,200 38,000 10,800 30,000
Total current assets ............ $234,000 $200,000 $185,000 $180,000
90. Suppose that Payne Company employs trend percentages to analyze performance with
Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be
closest to:
A) 128.6%
B) 74.1%
C) 112.5%
D) 135.0%

Ans: D

Solution:

Sales as trend percentage = Year 4 sales ÷ Year 1 sales

= ($810,000 ÷ $600,000) = 135.0%

91. Suppose that Payne Company employs trend percentages to analyze performance with
Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be
closest to:
A) 125%
B) 80%
C) 90%
D) 36%

Ans: B

Solution:

Inventory as trend percentage = Year 3 inventory ÷ Year 2 inventory

= $72,000 ÷ $90,000 = 80%
92. Suppose that Payne Company employs common size statements to analyze changes in
the current assets. The increase in the Accounts Receivable account when comparing
Year 3 to Year 2 would be closest to:
A) 1.3% increase
B) 0.4% increase
C) 5.3% increase
D) 4.2% increase

Ans: A

Solution:

Increase in Accounts Receivable account = ($60,000 − $59,200) ÷ $59,200

= 1.3%
Use the following to answer questions 93-99:

Financial statements for Orahood Company appear below:

Orahood Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities ....................... $ 200 $ 170
Accounts receivable, net ................................. 170 140
Inventory ......................................................... 120 120
Prepaid expenses ............................................. 20 30
Total current assets ............................................. 510 460
Noncurrent assets:
Plant & equipment, net.................................... 1,530 1,540
Total assets ......................................................... $2,040 $2,000

Current liabilities:
Accounts payable ............................................ $ 170 $ 160
Accrued liabilities ........................................... 60 50
Notes payable, short term................................ 270 290
Total current liabilities ....................................... 500 500
Noncurrent liabilities:
Bonds payable ................................................. 290 300
Total liabilities ................................................ 790 800
Stockholders’ equity:
Preferred stock, $10 par, 10% ......................... 100 100
Common stock, $5 par .................................... 200 200
Additional paid-in capital–common stock ...... 280 280
Retained earnings ............................................ 670 620
Total stockholders’ equity .................................. 1,250 1,200
Total liabilities & stockholders’ equity .............. $2,040 $2,000
 Orahood Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) ......................................... $1,740

Cost of goods sold .............................................. 1,210
Gross margin ...................................................... 530
Selling and administrative expense .................... 210
Net operating income ......................................... 320
Interest expense .................................................. 30
Net income before taxes ..................................... 290
Income taxes (30%) ............................................ 87
Net income ......................................................... $ 203

Dividends during Year 2 totaled $153 thousand, of which $10 thousand were preferred
dividends. The market price of a share of common stock on December 31, Year 2 was $80.

93. Orahood Company's earnings per share of common stock for Year 2 was closest to:
A) $7.25
B) $2.14
C) $4.83
D) $5.08

Ans: C

Solution:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $5 per share = 40 shares
94. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:
A) 4.2%
B) 4.5%
C) 2.1%
D) 4.8%

Ans: B

Solution:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($203 − $10) ÷ (40 shares + 40 shares)/2 = $4.83 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $5 per share = 40 shares
Dividends per share = Common dividends ÷ Common shares
= $143 ÷ 40 shares = $3.58 per share
Dividend yield ratio = Dividends per share ÷ Market price per share = $3.58 ÷ $80 =
4.5%

95. Orahood Company's return on total assets for Year 2 was closest to:
A) 11.1%
B) 10.0%
C) 9.0%
D) 10.5%

Ans: A

Solution:

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

= $224 ÷ $2,020 = 11.1%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $203 + [$30 × (1 − 0.30)] = $224
**Average total assets = ($2,000 + $2,040) ÷ 2 = $2,020
96. Orahood Company's current ratio at the end of Year 2 was closest to:
A) 0.63
B) 1.02
C) 0.55
D) 1.25

Ans: B

Solution:

Current ratio = Current assets ÷ Current liabilities = $510 ÷ $500 = 1.02

97. Orahood Company's accounts receivable turnover for Year 2 was closest to:
A) 14.5
B) 10.1
C) 11.2
D) 7.8

Ans: C

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,740 ÷ $155 = 11.2

*Average accounts receivable = ($140 + $170) ÷ 2 = $155

98. Orahood Company's average sale period for Year 2 was closest to:
A) 25.2 days
B) 46.8 days
C) 32.5 days
D) 36.2 days

Ans: D

Solution:

Average sale period = 365 days ÷ Inventory turnover*

= 365 days ÷ 10.08 = 36.2 days
*Inventory turnover = Cost of goods sold ÷ Average inventory = $1,210 ÷ ($120 +
$120)/2 = 10.08
99. Orahood Company's times interest earned for Year 2 was closest to:
A) 9.7
B) 17.7
C) 6.8
D) 10.7

Ans: D

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $320 ÷ $30 = 10.07
Use the following to answer questions 100-103:

Financial statements for Matti Company appear below:

Matti Company
Balance Sheet
As of December 31
Year 2 Year 1
Current assets ........................................................ $ 90,000 $ 70,000
Long term investments .......................................... 110,000 110,000
Plant, property, and equipment (net) ..................... 500,000 420,000
Total assets ............................................................ $700,000 $600,000

Current liabilities ................................................... $110,000 $80,000

Bonds payable ....................................................... 140,000 100,000
Preferred stock (par value $100, 8%) .................... 75,000 75,000
Common stock (par value $5) ............................... 125,000 125,000
Additional paid-in capital–common stock ............ 220,000 220,000
Retained earnings .................................................. 30,000 0
Total liabilities and equities .................................. $700,000 $600,000

Matti Company
Income Statement
For the Year Ended December 31, Year 2

Sales ...................................................................... $800,000

Cost of goods sold ................................................. 450,000
Gross margin ......................................................... 350,000
Selling and administrative expense ....................... 250,000
Net operating income ............................................ 100,000
Interest expense ..................................................... 10,000
Net income before taxes ........................................ 90,000
Income taxes (30%) ............................................... 27,000
Net Income ............................................................ $ 63,000

Dividends were $33,000 for the year, of which $6,000 were for preferred stock.
100. The return on common stockholders' equity for Matti Company for Year 2 is closest
to:
A) 15.8%
B) 17.5%
C) 14.0%
D) 15.2%

Ans: A

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷

Average common stockholders' equity* = ($63,000 - $6,000) ÷ $360,000 = 15.8%

*Average common stockholders' equity = ($375,000 + $345,000) ÷ 2 = $360,000

101. The return on total assets for Matti Company for Year 2 is closest to:
A) 10.8%
B) 10.0%
C) 9.0%
D) 10.2%

Ans: A

Solution:

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

= $70,000 ÷ $650,000 = 10.8%
*Adjusted net income = Net income + [Interest expense × (1 − Tax rate)]
= $63,000 + [$10,000 × (1 − 0.30)] = $70,000
**Average total assets = ($600,000 + $700,000) ÷ 2 = $650,000
102. The times interest earned for Matti Company for Year 2 is closest to:
A) 6.3
B) 7.3
C) 9.0
D) 10.0

Ans: D
Solution:

Times interest earned = Net operating income ÷ Interest expense

= $100,000 ÷ $10,000 = 10.00

103. The book value per share for Matti Company as of December 31, Year 2 is closest to:
A) $18.00
B) $13.80
C) $28.00
D) $15.00

Ans: D

Solution:

Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $375,000 ÷ 25,000 = $15.00

*Number of common shares outstanding = Common stock ÷ Par value

= $125,000 ÷ $5 = 25,000
Use the following to answer questions 104-110:

Financial statements for Lardy Company appear below:

Lardy Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities .......................... $ 180 $ 180
Accounts receivable, net .................................... 220 190
Inventory ............................................................ 170 180
Prepaid expenses ................................................ 30 20
Total current assets ................................................ 600 570
Noncurrent assets:
Plant & equipment, net....................................... 1,830 1,820
Total assets ............................................................ $2,430 $2,390

Current liabilities:
Accounts payable ............................................... $ 120 $ 130
Accrued liabilities .............................................. 90 60
Notes payable, short term................................... 140 160
Total current liabilities .......................................... 350 350
Noncurrent liabilities:
Bonds payable .................................................... 360 400
Total liabilities ................................................... 710 750
Stockholders’ equity: ............................................
Preferred stock, $20 par, 10% ............................ 120 120
Common stock, $10 par ..................................... 140 140
Additional paid-in capital–common stock ......... 160 160
Retained earnings ............................................... 1,300 1,220
Total stockholders’ equity ..................................... 1,720 1,640
Total liabilities & stockholders’ equity ................. $2,430 $2,390
 Lardy Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) ............................................ $2,060

Cost of goods sold ................................................. 1,440
Gross margin ......................................................... 620
Selling and administrative expense ....................... 240
Net operating income ............................................ 380
Interest expense ..................................................... 40
Net income before taxes ........................................ 340
Income taxes (30%) ............................................... 102
Net income ............................................................ $ 238

Dividends during Year 2 totaled $158 thousand, of which $12 thousand were preferred
dividends. The market price of a share of common stock on December 31, Year 2 was $210.

104. Lardy Company's earnings per share of common stock for Year 2 was closest to:
A) $16.14
B) $24.29
C) $17.00
D) $3.65

Ans: A

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14

*Number of common shares outstanding = Common stock ÷ Par value

= $140 ÷ $10 =14
105. Lardy Company's price-earnings ratio on December 31, Year 2 was closest to:
A) 8.65
B) 13.01
C) 57.61
D) 12.35

Ans: B

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14

*Number of common shares outstanding = Common stock ÷ Par value

= $140 ÷ $10 =14

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

= $210 ÷ $16.14 = 13.01

106. Lardy Company's dividend payout ratio for Year 2 was closest to:
A) 38.4%
B) 23.5%
C) 66.4%
D) 64.6%

Ans: D
 Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14

*Number of common shares outstanding = Common stock ÷ Par value

= $140 ÷ $10 =14

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $10.43 ÷ $16.14 = 64.6%

*Dividends per share = Common dividends ÷ Common shares

= $146 ÷ 14 = $10.43

107. Lardy Company's dividend yield ratio on December 31, Year 2 was closest to:
A) 5.4%
B) 1.2%
C) 5.0%
D) 4.6%

Ans: C

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($238 − $12) ÷ 14 = $16.14

*Number of common shares outstanding = Common stock ÷ Par value

= $140 ÷ $10 =14

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $10.43 ÷ $16.14 = 64.6%

*Dividends per share = Common dividends ÷ Common shares

= $146 ÷ 14 = $10.43

Dividend yield ratio = Dividends per share ÷ Market price per share
= $10.43 ÷ $210 = 5.0%
108. Lardy Company's return on total assets for Year 2 was closest to:
A) 11.0%
B) 8.7%
C) 9.9%
D) 10.4%

Ans: A

Solution:

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

= $266 ÷ $2,410 = 11.0%

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

= $238 + 40 x (1 − .30) = $266

**Average total assets = ($2,390 + $2,430) ÷ 2 = $2,410

109. Lardy Company's return on common stockholders' equity for Year 2 was closest to:
A) 14.5%
B) 15.3%
C) 13.5%
D) 14.2%

Ans: A

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷

Average common stockholders' equity* = ($238 − $12) ÷ $1,560 = 14.5%

*Average common stockholders' equity = ($1,520 + $1,600) ÷ 2 = $1,560

 110. Lardy Company's book value per share at the end of Year 2 was closest to:
A) $21.43
B) $114.29
C) $10.00
D) $122.86

Ans: B

Solution:

Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $1,600 ÷ 14 = $114.29

*Number of common shares outstanding = Common stock ÷ Par value

= $140 ÷ $10 = 14

Use the following to answer questions 111-113:

Information concerning the common stock of Hopkins Company follows:

Market price per share on December 31 ... $36.00

Book value per share on December 31 ..... $27.00
Earnings per share for the year .................. $4.50
Par value per share .................................... $10.00
Dividend per share for the year ................. $1.80

111. Hopkins Company's dividend payout ratio is:

A) 60%
B) 40%
C) 5%
D) 18%

Ans: B

Solution:

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $1.80 ÷ $4.50 = 40%
112. Hopkins Company's price-earnings ratio is:
A) 8.0
B) 6.67
C) 6.0
D) 20.0

Ans: A

Solution:

Price-earnings ratio = Market price per share ÷ Earnings per share= $36.00 ÷ $4.50 =
8.0

113. Hopkins Company's dividend yield ratio is:

A) 18%
B) 12.5%
C) 6%
D) 5%

Ans: D

Solution:

Dividend yield ratio = Dividends per share ÷ Market price per share
= $1.80 ÷ $36.00 = 5%
Use the following to answer questions 114-120:

Erichsen Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash .................................................................... $ 120 $ 150
Accounts receivable ........................................... 200 180
Inventory ............................................................ 220 200
Prepaid expenses ................................................ 10 10
Total current assets ................................................ 550 540
Plant and equipment, net ....................................... 830 830
Total assets ............................................................ $1,380 $1,370

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 110 $ 100
Accrued liabilities .............................................. 30 30
Notes payable, short term................................... 50 50
Total current liabilities .......................................... 190 180
Bonds payable ....................................................... 250 300
Total liabilities ...................................................... 440 480
Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. 100 100
Common stock, $1 par value.............................. 200 200
Additional paid-in capital–common stock ......... 160 160
Retained earnings ............................................... 480 430
Total stockholders’ equity ..................................... 940 890
Total liabilities & stockholders’ equity ................. $1,380 $1,370
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,290
Cost of goods sold ................................................. 770
Gross margin ......................................................... 520
Selling and administrative expense ....................... 294
Net operating income ............................................ 226
Interest expense ..................................................... 33
Net income before taxes ........................................ 193
Income taxes (30%) ............................................... 58
Net income ............................................................ $ 135

Dividends on common stock during Year 2 totaled $80 thousand. Dividends on preferred
stock totaled $5 thousand. The market price of common stock at the end of Year 2 was $11.05
per share.

114. The earnings per share of common stock for Year 2 is closest to:
A) $0.68
B) $0.65
C) $1.13
D) $0.97

Ans: B

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200
115. The price-earnings ratio for Year 2 is closest to:
A) 11.39
B) 16.25
C) 17.00
D) 9.78

Ans: C

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

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

= $11.05 ÷ $0.65 = 17.00

116. The dividend payout ratio for Year 2 is closest to:

A) 61.5%
B) 769.2%
C) 59.3%
D) 65.4%

Ans: A

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

Dividend payout ratio = Dividends per share** ÷ Earnings per share

= $0.40 ÷ $0.65 = 61.5%

**Dividends per share = Common dividends ÷ Common shares

= $80 ÷ 200 = $0.40
117. The dividend yield ratio for Year 2 is closest to:
A) 94.12%
B) 3.85%
C) 3.62%
D) 0.23%

Ans: C

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($135 − $5) ÷ 200 = $0.65

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

Dividend payout ratio = Dividends per share** ÷ Earnings per share

= $0.40 ÷ $0.65 = 61.5%

**Dividends per share = Common dividends ÷ Common shares

= $80 ÷ 200 = $0.40

Dividend yield ratio = Dividends per share ÷ Market price per share
= $0.40 ÷ $11.05 = 3.62%

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

A) 11.50%
B) 9.78%
C) 11.46%
D) 9.82%

Ans: A
 Solution:

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

= $158.10 ÷ $1,375 = 11.50%

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

= $135 + 33 x (1 − 0.30) = $158.10

**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375

119. The return on common stockholders' equity for Year 2 is closest to:
A) 14.75%
B) 14.21%
C) 16.56%
D) 15.95%

Ans: D

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷

Average common stockholders' equity* = ($135 − $5) ÷ $815 = 15.95%

*Average common stockholders' equity = ($790 + $840) ÷ 2 = $815

120. The book value per share at the end of Year 2 is closest to:
A) $4.70
B) $4.20
C) $0.65
D) $6.90

Ans: B

Solution:

Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $840 ÷ 200 = $4.20

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200
Use the following to answer questions 121-127:

Excerpts from Jameel Corporation's most recent balance sheet and income statement appear
below:

Year 2 Year 1
Total assets ............................................................ $1,540 $1,530

Total liabilities ...................................................... $470 $490

Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. $ 100 $ 100
Common stock, $1 par value.............................. 200 200
Additional paid-in capital–common stock ......... 150 150
Retained earnings ............................................... 620 590
Total stockholders’ equity ..................................... $1,070 $1,040

Sales (all on account) $1,290

Cost of goods sold 790
Gross margin 500
Selling and administrative expense 334
Net operating income 166
Interest expense 30
Net income before taxes 136
Income taxes (30%) 41
Net income $ 95

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 $3.87
per share.
121. The earnings per share of common stock for Year 2 is closest to:
A) $0.48
B) $0.68
C) $0.45
D) $0.83

Ans: C

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($95 − $5) ÷ 200 = $0.45

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

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

A) 5.69
B) 8.60
C) 4.66
D) 8.06

Ans: B

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($95 − $5) ÷ 200 = $0.45

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $3.87 ÷ $0.45 = 8.60
123. The dividend payout ratio for Year 2 is closest to:
A) 1111.1%
B) 63.2%
C) 66.7%
D) 72.2%

Ans: C

Solution:

Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.30 ÷ $0.45 = 66.7%

*Dividends per share = Common dividends ÷ Common shares

= $60 ÷ 200 = $0.30

124. The dividend yield ratio for Year 2 is closest to:

A) 92.31%
B) 7.75%
C) 0.65%
D) 8.40%

Ans: B

Solution:

Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200

*Dividends per share = Common dividends ÷ Common shares

= $60 ÷ 200 = $0.30

Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.30 ÷ $3.87 = 7.75%
125. The return on total assets for Year 2 is closest to:
A) 6.17%
B) 7.53%
C) 6.19%
D) 7.56%

Ans: D

Solution:

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

= $116 ÷ $1,535 = 7.56%

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

= $95 + [$30 × (1 − 0.30)] = $116

**Average total assets = ($1,530 + $1,540) ÷ 2 = $1,535

126. The return on common stockholders' equity for Year 2 is closest to:
A) 9.42%
B) 8.53%
C) 9.00%
D) 9.95%

Ans: A

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends) ÷

Average common stockholders' equity* = ($95 − $5) ÷ $955 = 9.42%

*Average common stockholders' equity = ($940 + $970) ÷ 2 = $955

127. The book value per share at the end of Year 2 is closest to:
A) $5.35
B) $4.85
C) $0.45
D) $7.70

Ans: B

Solution:

Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $970 ÷ 200 = $4.85

*Number of common shares outstanding = Common stock ÷ Par value

= $200 ÷ $1 = 200
Use the following to answer questions 128-132:

Financial statements for Spencer Company appear below:

Spencer Company
Balance Sheet
December 31

Cash ....................................................................... $ 200,000

Accounts receivable .............................................. 240,000
Inventories ............................................................. 340,000
Prepaid expenses ................................................... 20,000
Plant and equipment (net) ..................................... 400,000
Total assets ............................................................ $1,200,000

Accounts payable .................................................. $ 300,000

Taxes payable ........................................................ 90,000
Interest payable ..................................................... 10,000
Long-term bonds payable ...................................... 200,000
Common stock $(14 par) ....................................... 280,000
Retained earnings .................................................. 320,000
Total liabilities & stockholders’ equities .............. $1,200,000

Spencer Company
Income Statement
For the Year Ended December 31

Sales (all on account) ............................................ $1,800,000

Cost of goods sold ................................................. 1,120,000
Gross margin ......................................................... 680,000
Selling and administrative expenses ..................... 520,000
Net operating income ............................................ 160,000
Interest expense ..................................................... 20,000
Net income before taxes ........................................ 140,000
Income taxes (30%) ............................................... 42,000
Net income ............................................................ $ 98,000
128. At December 31, Spencer Company's current ratio was closest to:
A) 1.10
B) 1.33
C) 2.00
D) 2.67

Ans: C

Solution:

Current ratio = Current assets ÷ Current liabilities

= ($1,200,000 − $400,000) ÷ ($300,000 + $90,000 + $10,000) = 2.00

129. At December 31, Spencer Company's acid-test ratio was closest to:
A) 1.10
B) 0.50
C) 0.90
D) 1.15

Ans: A

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $440,000 ÷ $400,000 = 1.10

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term

notes receivable = $200,000 + $240,000 = $440,000

130. Suppose that the Inventory account had a balance of $300,000 at the beginning of the
year. Spencer Company's inventory turnover for the year was closest to:
A) 3.50
B) 6.00
C) 5.63
D) 3.23

Ans: A
 Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120,000 ÷

$320,000 = 3.50

*Average inventory = ($300,000 + $340,000) ÷ 2 = $320,000

131. Suppose that the balance of Accounts Receivable remained unchanged between the
beginning and end of the year. Spencer Company's average collection period for the
year was closest to:
A) 27 days
B) 28 days
C) 49 days
D) 75 days

Ans: C

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,800,000 ÷ $240,000 = 7.5

*Average accounts receivable = ($240,000 + $240,000) ÷ 2 = $240,000

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 ÷ 7.5 = 49

132. Spencer Company's debt-to-equity ratio on December 31 was closest to:

A) 0.333
B) 0.500
C) 1.000
D) 0.375

Ans: C

Solution:

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

= ($300,000 + $90,000 + $10,000 + $200,000) ÷ ($280,000 + $320,000) = 1.000
Use the following to answer questions 133-139:

Financial statements for Marbet Company appear below:

Marbet Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities .......................... $ 160 $ 160
Accounts receivable, net .................................... 180 160
Inventory ............................................................ 110 130
Prepaid expenses ................................................ 40 40
Total current assets ................................................ 490 490
Noncurrent assets:
Plant & equipment, net....................................... 1,910 1,870
Total assets ............................................................ $2,400 $2,360

Current liabilities:
Accounts payable ............................................... $ 120 $ 150
Accrued liabilities .............................................. 80 50
Notes payable, short term................................... 200 200
Total current liabilities .......................................... 400 400
Noncurrent liabilities:
Bonds payable .................................................... 500 500
Total liabilities ................................................... 900 900
Stockholders’ equity:
Preferred stock, $10 par, 8% .............................. 120 120
Common stock, $5 par ....................................... 200 200
Additional paid-in capital–common stock ......... 280 280
Retained earnings ............................................... 900 860
Total stockholders’ equity ..................................... 1,500 1,460
Total liabilities & stockholders’ equity ................. $2,400 $2,360
 Marbet Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account) ............................................ $1,600

Cost of goods sold ................................................. 1,120
Gross margin ......................................................... 480
Selling and administrative expense ....................... 190
Net operating income ............................................ 290
Interest expense ..................................................... 50
Net income before taxes ........................................ 240
Income taxes (30%) ............................................... 72
Net income ............................................................ $ 168

133. Marbet Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to:
A) $90
B) $1,500
C) $490
D) $600

Ans: A

Solution:

Working capital = Current assets − Current liabilities = $490 − $400 = $90

134. Marbet Company's current ratio at the end of Year 2 was closest to:
A) 0.37
B) 1.20
C) 1.23
D) 0.44

Ans: C

Solution:

Current ratio = Current assets ÷ Current liabilities = $490 ÷ $400 = 1.23

135. Marbet Company's acid-test ratio at the end of Year 2 was closest to:
A) 0.85
B) 2.27
C) 0.31
D) 0.44

Ans: A

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $340 ÷ $400 = 0.85

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term

notes receivable = $160 + $180 = $340

136. Marbet Company's accounts receivable turnover for Year 2 was closest to:
A) 9.3
B) 13.3
C) 6.6
D) 9.4

Ans: D

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,600 ÷ $170 = 9.4

*Average accounts receivable = ($160 + $180) ÷ 2 = $170

137. Marbet Company's average collection period for Year 2 was closest to:
A) 27.4 days
B) 39.1 days
C) 55.4 days
D) 38.8 days

Ans: D

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,600 ÷ $170 = 9.4

*Average accounts receivable = ($160 + $180) ÷ 2 = $170

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 ÷ 9.4 = 38.8 days

138. Marbet Company's inventory turnover for Year 2 was closest to:
A) 13.3
B) 6.6
C) 9.4
D) 9.3

Ans: D

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3

*Average inventory = ($130 + $110) ÷ 2 = $120

 139. Marbet Company's average sale period for Year 2 was closest to:
A) 38.8 days
B) 55.4 days
C) 39.1 days
D) 27.4 days

Ans: C

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,120 ÷ $120 = 9.3

*Average inventory = ($130 + $110) ÷ 2 = $120

Average sale period = 365 days ÷ Inventory turnover = 365 ÷ 9.3

= 39.1 days

Use the following to answer questions 140-142:

Selected financial data for Drew Company appear below:

Drew Company
Selected Financial Data
As of December 31
Year 2 Year 1
Cash ....................................................................... $75,000 $35,000
Accounts receivable (net) ...................................... $225,000 $200,000
Inventory ............................................................... $270,000 $210,000
Short-term marketable securities........................... $40,000 $20,000
Land and building (net) ......................................... $500,000 $500,000
Mortgage payable-current portion......................... $30,000 $25,000
Accounts payable and accrued liabilities .............. $120,000 $110,000
Short-term notes payable ....................................... $50,000 $70,000

Year Ended December 31

Year 2 Year 1
Sales (all on credit) ................................................ $1,500,000 $1,300,000
Cost of goods sold ................................................. $900,000 $800,000
140. Drew Company's acid-test ratio as of December 31, Year 2, was closest to:
A) 3.6
B) 3.1
C) 2.0
D) 1.7

Ans: D Source: CPA, adapted

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities

= $340,000 ÷ ($30,000 + $120,000 + $50,000) = 1.7

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term

notes receivable = $75,000 + $225,000 + $40,000 = $340,000

141. Drew Company's average sale period for Year 2 was closest to:
A) 97 days
B) 34 days
C) 58 days
D) 219 days

Ans: A Source: CPA, adapted

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory*

= $900,000 ÷ $240,000 = 3.75
*Average inventory = ($210,000 + $270,000) ÷ 2 = $240,000

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 3.75 = 97 days
142. Drew Company's average collection period for Year 2 was closest to:
A) 86 days
B) 52 days
C) 55 days
D) 304 days

Ans: B Source: CPA, adapted

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,500,000 ÷ $212,500 = 7.06
*Average accounts receivable = ($200,000 + $225,000) ÷ 2 = $212,500

Average collection period = 365 days ÷ Accounts receivable turnover = 365 days ÷
7.06 = 52 days
Use the following to answer questions 143-149:

Rosenfield Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash .................................................................... $ 10 $ 130
Accounts receivable ........................................... 150 130
Inventory ............................................................ 140 120
Prepaid expenses ................................................ 20 20
Total current assets ................................................ 320 400
Plant and equipment, net ....................................... 890 830
Total assets ............................................................ $1,210 $1,230

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 160 $ 180
Accrued liabilities .............................................. 60 70
Notes payable, short term................................... 60 70
Total current liabilities .......................................... 280 320
Bonds payable ....................................................... 70 110
Total liabilities ...................................................... 350 430
Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. 100 100
Common stock, $1 par value.............................. 200 200
Additional paid-in capital–common stock ......... 180 180
Retained earnings ............................................... 380 320
Total stockholders’ equity ..................................... 860 800
Total liabilities & stockholders’ equity ................. $1,210 $1,230
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,280
Cost of goods sold ................................................. 870
Gross margin ......................................................... 410
Selling and administrative expense ....................... 215
Net operating income ............................................ 195
Interest expense ..................................................... 16
Net income before taxes ........................................ 179
Income taxes (30%) ............................................... 54
Net income ............................................................ $ 125

143. The working capital at the end of Year 2 is:

A) $320 thousand
B) $860 thousand
C) $890 thousand
D) $40 thousand

Ans: D

Solution:

Working capital = Current assets − Current liabilities = $320 thousand − $280

thousand = $40 thousand

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

A) 1.09
B) 1.14
C) 0.26
D) 0.29

Ans: B

Solution:

Current ratio = Current assets ÷ Current liabilities = $320 ÷ $280 = 1.14

145. The acid-test ratio at the end of Year 2 is closest to:
A) 0.91
B) 1.14
C) 0.57
D) 0.64

Ans: C

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $160 ÷ $280 = 0.57

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $10 + $0 + $150 = $160

146. The accounts receivable turnover for Year 2 is closest to:

A) 1.15
B) 8.53
C) 0.87
D) 9.14

Ans: D

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,280 ÷ $140 = 9.14
*Average accounts receivable = ($130 + $150) ÷ 2 = $140

147. The average collection period for Year 2 is closest to:

A) 1.2 days
B) 39.9 days
C) 0.9 days
D) 42.8 days

Ans: B
 Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,280 ÷ $140 = 9.14
*Average accounts receivable = ($130 + $150) ÷ 2 = $140

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 9.14 = 39.9 days

148. The inventory turnover for Year 2 is closest to:

A) 0.86
B) 6.21
C) 6.69
D) 1.17

Ans: C

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory*

= $870 ÷ $130 = 6.69
*Average inventory = ($140 + $120) ÷ 2 = $130

149. The average sale period for Year 2 is closest to:

A) 248.1 days
B) 54.6 days
C) 58.8 days
D) 39.9 days

Ans: B

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory*

= $870 ÷ $130 = 6.69
*Average inventory = ($140 + $120) ÷ 2 = $130

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 6.69 = 54.6 days
Use the following to answer questions 150-156:

Excerpts from Debnam Corporation's most recent balance sheet appear below:

Year 2 Year 1
Current assets:
Cash ............................................ $150 $150
Accounts receivable ................... 130 110
Inventory .................................... 160 150
Prepaid expenses ........................ 90 90
Total current assets ........................ $530 $500
Total current liabilities .................. $200 $210

Sales on account in Year 2 amounted to $1,170 and the cost of goods sold was $700.

150. The working capital at the end of Year 2 is:

A) $330 thousand
B) $530 thousand
C) $1,030 thousand
D) $860 thousand

Ans: A

Solution:

Working capital = Current assets − Current liabilities = $530 thousand − $200

thousand = $330 thousand

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

A) 0.38
B) 0.26
C) 2.65
D) 0.68

Ans: C

Solution:

Current ratio = Current assets ÷ Current liabilities = $530 ÷ $200 = 2.65

152. The acid-test ratio at the end of Year 2 is closest to:
A) 1.40
B) 1.85
C) 1.47
D) 2.65

Ans: A

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $280 ÷ $200 = 1.40

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $150 + $0 + $130 = $280

153. The accounts receivable turnover for Year 2 is closest to:

A) 9.00
B) 0.85
C) 1.18
D) 9.75

Ans: D

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,170 ÷ $120 = 9.75
*Average accounts receivable = ($110 + $130) ÷ 2 = $120

154. The average collection period for Year 2 is closest to:

A) 0.8 days
B) 37.4 days
C) 1.2 days
D) 40.6 days

Ans: B
 Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,170 ÷ $120 = 9.75
*Average accounts receivable = ($110 + $130) ÷ 2 = $120
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 9.75 = 37.4 days

155. The inventory turnover for Year 2 is closest to:

A) 1.07
B) 0.94
C) 4.38
D) 4.52

Ans: D

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52
*Average inventory = ($150 + $160) ÷ 2 = $155

156. The average sale period for Year 2 is closest to:

A) 80.8 days
B) 49.9 days
C) 83.3 days
D) 218.4 days

Ans: A

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $700 ÷ $155 = 4.52
*Average inventory = ($150 + $160) ÷ 2 = $155
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 4.52 = 80.8 days
Use the following to answer questions 157-161:

Excerpts from Jordison Corporation's most recent balance sheet appear below:

Year 2 Year 1
Current assets:
Cash ............................................ $200 $160
Accounts receivable ................... 160 150
Inventory .................................... 170 150
Prepaid expenses ........................ 80 80
Total current assets ........................ $610 $540
Total current liabilities .................. $290 $270

Sales on account in Year 2 amounted to $1,240 and the cost of goods sold was $730.

157. The working capital at the end of Year 2 is:

A) $320 thousand
B) $840 thousand
C) $1,000 thousand
D) $610 thousand

Ans: A

Solution:

Working capital = Current assets − Current liabilities = $610 thousand − $290

thousand = $320 thousand

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

A) 2.10
B) 0.42
C) 0.31
D) 0.74

Ans: A

Solution:

Current ratio = Current assets ÷ Current liabilities = $610 ÷ $290 = 2.10

159. The acid-test ratio at the end of Year 2 is closest to:
A) 1.36
B) 2.10
C) 1.24
D) 1.52

Ans: C

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $360 ÷ $290 = 1.24

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $200 + $0 + $160 = $360

160. The accounts receivable turnover for Year 2 is closest to:

A) 1.07
B) 0.94
C) 8.00
D) 7.75

Ans: C

Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =

$1,240 ÷ $155 = 8.00
*Average accounts receivable = ($150 + $160) ÷ 2 = $155

161. The inventory turnover for Year 2 is closest to:

A) 1.13
B) 4.56
C) 4.29
D) 0.88

Ans: B

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $160 = 4.56
*Average inventory = ($150 + $170) ÷ 2 = $160
Use the following to answer questions 162-166:

Data from Carrel Corporation's most recent balance sheet appear below:

Year 2 Year 1
Current assets:
Cash ............................................ $100 $160
Accounts receivable ................... 250 300
Inventory .................................... 120 110
Prepaid expenses ........................ 90 80
Total current assets ........................ $560 $650
Total current liabilities .................. $250 $270

Sales on account in Year 2 amounted to $1,440 and the cost of goods sold was $890.

162. The working capital at the end of Year 2 is:

A) $930 thousand
B) $310 thousand
C) $950 thousand
D) $560 thousand

Ans: B

Solution:

Working capital = Current assets − Current liabilities = $560 thousand − $250

thousand = $310 thousand

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

A) 0.38
B) 0.96
C) 2.24
D) 0.36

Ans: C

Solution:

Current ratio = Current assets ÷ Current liabilities = $560 ÷ $250 = 2.24

164. The acid-test ratio at the end of Year 2 is closest to:
A) 1.40
B) 2.24
C) 1.76
D) 1.04

Ans: A

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $350 ÷ $250 = 1.40

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $100 + $0 + $250 = $350

165. The average collection period for Year 2 is closest to:

A) 69.7 days
B) 0.8 days
C) 1.2 days
D) 63.4 days

Ans: A

Solution:

Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 days ÷ 5.24 = 69.7 days
*Accounts receivable turnover = Net credit sales ÷ Average accounts receivable
= $1,440 ÷ [($300 + $250) ÷ 2] = 5.24
166. The average sale period for Year 2 is closest to:
A) 30.4 days
B) 47.2 days
C) 49.2 days
D) 225.6 days

Ans: B

Solution:

Inventory turnover = Cost of goods sold ÷ Average inventory* = $890 ÷ $115 = 7.73
*Average inventory = ($110 + $120) ÷ 2 = $115

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 7.73 = 47.2 days
Use the following to answer questions 167-168:

Financial statements for Narasaki Company appear below:

Narasaki Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities .......................... $ 130 $ 120
Accounts receivable, net .................................... 200 170
Inventory ............................................................ 130 130
Prepaid expenses ................................................ 90 80
Total current assets ................................................ 550 500
Noncurrent assets:
Plant & equipment, net....................................... 1,380 1,360
Total assets ............................................................ $1,930 $1,860

Current liabilities:
Accounts payable ............................................... $ 160 $ 160
Accrued liabilities .............................................. 90 80
Notes payable, short term................................... 110 110
Total current liabilities .......................................... 360 350
Noncurrent liabilities:
Bonds payable .................................................... 510 500
Total liabilities ...................................................... 870 850
Stockholders’ equity:
Preferred stock, $10 par, 6% .............................. 100 100
Common stock, $2 par ....................................... 160 160
Additional paid-in capital–common stock ......... 240 240
Retained earnings ............................................... 560 510
Total stockholders’ equity ..................................... 1,060 1,010
Total liabilities & stockholders’ equity ................. $1,930 $1,860
 Narasaki Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ............................................ $2,960
Cost of goods sold ................................................. 2,070
Gross margin ......................................................... 890
Selling and administrative expense ....................... 350
Net operating income ............................................ 540
Interest expense ..................................................... 50
Net income before taxes ........................................ 490
Income taxes (30%) ............................................... 147
Net income ............................................................ $ 343

167. Narasaki Company's times interest earned for Year 2 was closest to:
A) 17.8
B) 10.8
C) 9.8
D) 6.9

Ans: B

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $540 ÷ $50 = 10.8

168. Narasaki Company's debt-to-equity ratio at the end of Year 2 was closest to:
A) 0.48
B) 0.34
C) 1.55
D) 0.82

Ans: D

Solution:

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

= $870 ÷ $1,060 = 0.82
Use the following to answer questions 169-170:

Parmeter Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash ................................................................. $ 80 $ 140
Accounts receivable ........................................ 120 110
Inventory ......................................................... 130 110
Prepaid expenses ............................................. 100 90
Total current assets ............................................. 430 450
Plant and equipment, net .................................... 670 730
Total assets ......................................................... $1,100 $1,180

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................ $ 170 $ 190
Accrued liabilities ........................................... 40 50
Notes payable, short term................................ 80 90
Total current liabilities ....................................... 290 330
Bonds payable .................................................... 70 120
Total liabilities ................................................... 360 450
Stockholders’ equity: .........................................
Preferred stock, $100 par value, 5% ............... 100 100
Common stock, $2 par value........................... 200 200
Additional paid-in capital–common stock ...... 120 120
Retained earnings ............................................ 320 310
Total stockholders’ equity .................................. 740 730
Total liabilities & stockholders’ equity .............. $1,100 $1,180
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ......................................... $1,270
Cost of goods sold .............................................. 790
Gross margin ...................................................... 480
Selling and administrative expense .................... 369
Net operating income ......................................... 111
Interest expense .................................................. 18
Net income before taxes ..................................... 93
Income taxes (30%) ............................................ 28
Net income ......................................................... $ 65

169. The times interest earned for Year 2 is closest to:

A) 5.17
B) 8.81
C) 6.17
D) 3.61

Ans: C

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $111 ÷ $18 = 6.17

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

A) 0.20
B) 0.56
C) 0.09
D) 0.49

Ans: D

Solution:

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

= $360 ÷ $740 = 0.49
Use the following to answer questions 171-172:

Data from Pruette Corporation's most recent balance sheet and the company's income
statement appear below:

Year 2 Year 1
Total assets .................................... $1,260 $1,230
Total liabilities .............................. $580 $560
Total stockholders’ equity ............. $680 $670

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ................................ $1,270
Cost of goods sold .................................................860
Gross margin .........................................................410
Selling and administrative expense .......................280
Net operating income ............................................130
Interest expense ..................................................... 30
Net income before taxes ........................................100
Income taxes (30%) ............................................... 30
Net income ............................................................
$ 70

171. The times interest earned for Year 2 is closest to:

A) 6.19
B) 3.33
C) 4.33
D) 2.33

Ans: C

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $130 ÷ $30 = 4.33
172. The debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.34
B) 0.85
C) 1.21
D) 0.43

Ans: B

Solution:

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

= $580 ÷ $680 = 0.85
Essay Questions

173. Espinola Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash ................................................................... $ 320 $ 180
Accounts receivable .......................................... 220 240
Inventory ........................................................... 140 130
Prepaid expenses ............................................... 20 20
Total current assets ............................................... 700 570
Plant and equipment, net ...................................... 860 920
Total assets ........................................................... $1,560 $1,490

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable .............................................. $ 200 $ 170
Accrued liabilities ............................................. 80 80
Notes payable, short term .................................. 40 40
Total current liabilities ......................................... 320 290
Bonds payable ...................................................... 210 220
Total liabilities ...................................................... 530 510
Stockholders’ equity:
Preferred stock, $100 par value, 5% ................. 100 100
Common stock, $1 par value ............................. 100 100
Additional paid-in capital–common stock ........ 150 150
Retained earnings .............................................. 680 630
Total stockholders’ equity .................................... 1,030 980
Total liabilities & stockholders’ equity ................ $1,560 $1,490
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ........................................... $1,220
Cost of goods sold ................................................ 790
Gross margin ........................................................ 430
Selling and administrative expense ...................... 268
Net operating income ........................................... 162
Interest expense .................................................... 26
Net income before taxes ....................................... 136
Income taxes (30%) .............................................. 41
Net income ........................................................... $ 95

Dividends on common stock during Year 2 totaled $40 thousand. Dividends on

preferred stock totaled $5 thousand. The market price of common stock at the end of
Year 2 was $12.87 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.
Ans:

a. Gross margin percentage = Gross margin ÷ Sales = $430 ÷ $1,220 = 35.2%

b. Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($95 − $5) ÷ (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)
= $12.87 ÷ $0.90 = 14.3

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $0.40 ÷ $0.90 = 44.4%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $40 ÷ 100 shares = $0.40 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share
= $0.40 ÷ $12.87 = 3.11%

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $113.2 ÷ $1,525 = 7.42%
*Adjusted net income
= Net income + [Interest expense × (1−Tax rate)]
= $95 + 26 × (1-0.30) = $113.2
**Average total assets = ($1,560 + $1,490) ÷ 2 = $1,525

g. Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity*
= ($95 − $5) ÷ $905 = 9.94%
*Average common stockholders' equity = ($930 + $880) ÷ 2 = $905

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

shares outstanding* = $930 ÷ 100 shares = $9.30 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $100 ÷ $1 per share = 100 shares

i. Working capital = Current assets − Current liabilities = $700 - $320 = $380

 j. Current ratio = Current assets ÷ Current liabilities = $700 ÷ $320 = 2.19

k. Acid-test ratio = Quick assets* ÷ Current liabilities = $540 ÷ $320 = 1.69

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-
term notes receivable = $320 + $0 + $220 = $540

l. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $1,220 ÷ $230 = 5.30
*Average accounts receivable = ($220 + $240) ÷ 2 = $230

m. Average collection period = 365 days ÷ Accounts receivable turnover (see

above) = 365 days ÷ 5.30 = 68.9 days

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

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

o. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.85 = 62.4 days

p. Times interest earned = Net operating income ÷ Interest expense

= $162 ÷ $26 = 6.23

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

= $530 ÷ $1,030 = 0.51

LO: 1,2,3,4
174. Slaubaugh Corporation's most recent balance sheet and income statement appear
below:
Statement of Financial Position
December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash .................................................................... $ 100 $ 140
Accounts receivable ........................................... 160 180
Inventory ............................................................ 210 190
Prepaid expenses ................................................ 40 50
Total current assets ................................................ 510 560
Plant and equipment, net ....................................... 860 820
Total assets ............................................................ $1,370 $1,380

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 160 $ 180
Accrued liabilities .............................................. 80 80
Notes payable, short term ................................... 80 80
Total current liabilities .......................................... 320 340
Bonds payable ....................................................... 70 100
Total liabilities ....................................................... 390 440
Stockholders’ equity:
Preferred stock, $100 par value, 10% ................ 200 200
Common stock, $1 par value .............................. 200 200
Additional paid-in capital–common stock ......... 130 130
Retained earnings ............................................... 450 410
Total stockholders’ equity ..................................... 980 940
Total liabilities & stockholders’ equity ................. $1,370 $1,380
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,350
Cost of goods sold ................................................. 820
Gross margin ......................................................... 530
Selling and administrative expense ....................... 399
131
Net operating income ............................................
Interest expense ..................................................... 17
Net income before taxes ........................................ 114
Income taxes (30%) ............................................... 34
Net income ............................................................ $ 80

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

preferred stock totaled $20 thousand. The market price of common stock at the end of
Year 2 was $2.88 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.

Ans:
a. Gross margin percentage = Gross margin ÷ Sales = $530 ÷ $1,350 = 39.3%

b. Earnings per share = (Net Income - Preferred Dividends)

÷ Average number of common shares outstanding*
= ($80 - $20) ÷ (200 shares + 200 shares)/2 = $0.30 per share
*Number of common shares outstanding = Common stock ÷ Par value = $200 ÷
$1 per share = 200 shares

c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $2.88 ÷ $0.30 = 9.6
 d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $0.10 ÷ $0.30 = 33.3%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $20 ÷ 200 shares = $0.10 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share
= $0.10 ÷ $2.88 = 3.47%

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $91.9 ÷ $1,375 = 6.68%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $80 + 17 × (1−0.30) = $91.9
**Average total assets = ($1,370 + $1,380) ÷ 2 = $1,375

g. Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity*
= ($80 − $20) ÷ $760 = 7.89%
*Average common stockholders' equity = ($780 + $740) ÷ 2 = $760

h. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $780 ÷ 200 shares = $3.90 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $1 per share = 200 shares

LO: 1,2
175. Philo Corporation's most recent income statement appears below:

Sales (all on account) ................................ $561,000

Cost of goods sold ..................................... 325,000
Gross margin ............................................. 236,000
Selling and administrative expense ........... 106,000
Net operating income ................................ 130,000
Interest expense ......................................... 35,000
Net income before taxes ............................ 95,000
Income taxes .............................................. 30,000
Net income ................................................ $ 65,000

Required:

Compute the gross margin percentage.

Ans:

Gross margin percentage = Gross margin ÷ Sales = $236,000 ÷ $561,000 = 42.1%

176. Financial statements for Pratt Company appear below:

Pratt Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities .......................... $ 140 $ 140
Accounts receivable, net .................................... 190 180
Inventory ............................................................ 150 150
Prepaid expenses ................................................ 70 70
Total current assets ................................................ 550 540
Noncurrent assets:
Plant & equipment, net ....................................... 1,490 1,420
Total assets ............................................................ $2,040 $1,960

Current liabilities:
Accounts payable ............................................... $ 160 $ 160
Accrued liabilities .............................................. 50 60
Notes payable, short term ................................... 230 250
Total current liabilities .......................................... 440 470
Noncurrent liabilities:
Bonds payable .................................................... 300 300
Total liabilities ....................................................... 740 770
Stockholders’ equity:
Preferred stock, $5 par, 10% .............................. 120 120
Common stock, $5 par ....................................... 180 180
Additional paid-in capital–common stock ......... 210 210
Retained earnings ............................................... 790 680
Total stockholders’ equity ..................................... 1,300 1,190
Total liabilities & stockholders’ equity ................. $2,040 $1,960
 Pratt Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ............................................ $2,000
Cost of goods sold ................................................. 1,400
Gross margin ......................................................... 600
Selling and administrative expense ....................... 240
Net operating income ............................................ 360
Interest expense ..................................................... 30
Net income before taxes ........................................ 330
Income taxes (30%) ............................................... 99
Net income ............................................................ $ 231

Dividends during Year 2 totaled $121 thousand, of which $12 thousand were preferred
dividends. The market price of a share of common stock on December 31, Year 2 was
$80.

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.
Ans:

a. Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding*
= ($231 − $12) ÷ 36 = $6.08

*Number of common shares outstanding = Common stock ÷ Par value

= $180 ÷ $5 = 36

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $80 ÷ $6.08 = 13.2

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $3.03 ÷ $6.08 = 49.8%

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

= $109 ÷ 36 = $3.03
**See above

d. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $3.03 ÷ $80.00 = 3.78% *See above

e. Return on total assets = Adjusted net income* ÷ Average total assets**

= $252 ÷ $2,000 = 12.60%

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

= $231 + 30 × (1 − 0.30) = $252

**Average total assets = ($2,040 + $1,960) ÷ 2 = $2,000

f. Return on common stockholders' equity = (Net income − Preferred dividends)

÷
Average common stockholders' equity* = ($231 − $12) ÷ $1,125 = 19.47%

*Average common stockholders' equity = ($1,180 + $1,070) ÷ 2 = $1,125

g. Book value per share = Common stockholders' equity ÷

Number of common shares outstanding* = $1,180 ÷ 36 = $32.78

*Number of common shares outstanding = Common stock ÷ Par value

= $180 ÷ $5 = 36
 h. Working capital = Current assets − Current liabilities = $550 − $440 = $110

i. Current ratio = Current assets ÷ Current liabilities = $550 ÷ $440 = 1.25

j. Acid-test ratio = Quick assets* ÷ Current liabilities = $330 ÷ $440 = 0.75

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-

term notes receivable = $140 + $190 = $330

k. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $2,000 ÷ $185 = 10.81

*Average accounts receivable = ($190 + $180) ÷ 2 = $185

l. Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 ÷ 10.81 = 33.8 days *See above

m. Inventory turnover = Cost of goods sold ÷ Average inventory* = $1,400 ÷

$150 = 9.33

*Average inventory = ($150 + $150) ÷ 2 = $150

n. Average sale period = 365 days ÷ Inventory turnover* = 365 ÷9.33

= 39.1 days *See above

o. Times interest earned = Net operating income ÷ Interest expense

= $360 ÷ $30 = 12.00

p. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $740 ÷ $1,300

= 0.57

LO: 2,3,4
177. Financial statements for Qadri Company appear below:

Qadri Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities .......................... $ 120 $ 100
Accounts receivable, net .................................... 130 120
Inventory ............................................................ 160 180
Prepaid expenses ................................................ 50 50
Total current assets ................................................ 460 450
Noncurrent assets:
Plant & equipment, net ....................................... 1,730 1,730
Total assets ............................................................ $2,190 $2,180

Current liabilities:
Accounts payable ............................................... $ 50 $ 100
Accrued liabilities .............................................. 60 50
Notes payable, short term ................................... 160 200
Total current liabilities .......................................... 270 350
Noncurrent liabilities:
Bonds payable .................................................... 280 300
Total liabilities ....................................................... 550 650
Stockholders’ equity:
Preferred stock, $10 par, 5% .............................. 120 120
Common stock, $10 par ..................................... 220 220
Additional paid-in capital–common stock ......... 110 110
Retained earnings ............................................... 1,190 1,080
Total stockholders’ equity ..................................... 1,640 1,530
Total liabilities & stockholders’ equity ................. $2,190 $2,180
 Qadri Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ............................................ $2,300
Cost of goods sold ................................................. 1,610
Gross margin ......................................................... 690
Selling and administrative expense ....................... 270
Net operating income ............................................ 420
Interest expense ..................................................... 30
Net income before taxes ........................................ 390
Income taxes (30%) ............................................... 117
Net income ............................................................ $ 273

Dividends during Year 2 totaled $163 thousand, of which $6 thousand were preferred
dividends. The market price of a share of common stock on December 31, Year 2 was
$150.

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.

Ans:

a. Earnings per share = (Net Income − Preferred Dividends) ÷

Average number of common shares outstanding* = ($273 − $6) ÷ 22 = $12.14

*Number of common shares outstanding = Common stock ÷ Par value

= $220 ÷ $10 = 22

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $150 ÷ $12.14 = 12.4
c. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $7.14 ÷ $150.00 = 4.76%

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

= $157 ÷ 22 = $7.14
**See above

d. Return on total assets = Adjusted net income* ÷ Average total assets**

= $294 ÷ $2,185 = 13.46%

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

= $273 + 30 × (1 − 0.30) = $294

**Average total assets = ($2,190 + $2,180) ÷ 2 = $2,185

e. Return on common stockholders' equity = (Net income − Preferred dividends)

÷
Average common stockholders' equity* = ($273 − $6) ÷ $1,465 = 18.23%

*Average common stockholders' equity = ($1,520 + $1,410) ÷ 2 = $1,465

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

shares outstanding* = $1,520 ÷ 22 = $69.09

*Number of common shares outstanding = Common stock ÷ Par value

= $220 ÷ $10 = 22
178. Maranville Corporation's most recent balance sheet and income statement appear
below:
Statement of Financial Position
December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash .................................................................... $ 170 $ 180
Accounts receivable ........................................... 160 180
Inventory ............................................................ 170 160
Prepaid expenses ................................................ 70 60
Total current assets ................................................ 570 580
Plant and equipment, net ....................................... 840 830
Total assets ............................................................ $1,410 $1,410

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 150 $ 160
Accrued liabilities .............................................. 40 40
Notes payable, short term ................................... 50 50
Total current liabilities .......................................... 240 250
Bonds payable ....................................................... 90 100
Total liabilities ....................................................... 330 350
Stockholders’ equity:
Preferred stock, $100 par value, 10% ................ 200 200
Common stock, $2 par value .............................. 400 400
Additional paid-in capital–common stock ......... 140 140
Retained earnings ............................................... 340 320
Total stockholders’ equity ..................................... 1,080 1,060
Total liabilities & stockholders’ equity ................. $1,410 $1,410
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,410
Cost of goods sold ................................................. 860
Gross margin ......................................................... 550
Selling and administrative expense ....................... 449
Net operating income ............................................ 101
Interest expense ..................................................... 15
Net income before taxes ........................................ 86
Income taxes (30%) ............................................... 26
Net income ............................................................ $ 60

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

preferred stock totaled $20 thousand. The market price of common stock at the end of
Year 2 was $2.36 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.

Ans:

a. Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($60 - $20) ÷ (200 shares + 200 shares)/2 = $0.20 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $2.36 ÷ $0.20 = 11.8
c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $0.10 ÷ $0.20 = 50.0%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $20 ÷ 200 shares = $0.10 per share

d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share = $0.10 ÷ $2.36 = 4.24%

e. Return on total assets = Adjusted net income* ÷ Average total assets**

= $70.5 ÷ $1,410 = 5.00%
*Adjusted net income
= Net income + [Interest expense × (1−Tax rate)]
= $60 + 15 × (1 − 0.30) = $70.5
**Average total assets = ($1,410 + $1,410) ÷ 2 = $1,410

f. Return on common stockholders' equity

= (Net income − Preferred dividends) ÷ Average common stockholders' equity*
= ($60 − $20) ÷ $870 = 4.60%
*Average common stockholders' equity = ($880 + $860) ÷ 2 = $870

g. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $880 ÷ 200 shares = $4.40 per
share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares
179. Isidro Corporation has provided the following financial data (in thousands of dollars):

Year 2 Year 1
Total assets ............................................................ $1,520 $1,490
Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. $200 $200
Common stock, $2 par value .............................. $400 $400
Additional paid-in capital–common stock ......... $160 $160
Retained earnings ............................................... $380 $320

Net income for Year 2 was $110 thousand. Interest expense was $21 thousand. The
tax rate was 30%. 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 $9.15 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.

Ans:

a. Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding*
= ($110 − $10) ÷ (200 shares + 200 shares)/2 = $0.50 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $9.15 ÷ $0.50 = 18.3

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see
above)
= $0.20 ÷ $0.50 = 40.0%
*Dividends per share = Common dividends ÷ Common shares (see above)
= $40 ÷ 200 shares = $0.20 per share
 d. Dividend yield ratio = Dividends per share (see above) ÷ Market price per
share = $0.20 ÷ $9.15 = 2.19%

e. Return on total assets = Adjusted net income* ÷ Average total assets**

= $124.7 ÷ $1,505 = 8.29%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $110 + 21 × (1 − 0.30) = $124.7
**Average total assets = ($1,520 + $1,490) ÷ 2 = $1,505

f. Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity* = ($110 − $10) ÷ $910 = 10.99%
*Average common stockholders' equity = ($940 + $880) ÷ 2 = $910

g. Book value per share = Common stockholders' equity

÷ Number of common shares outstanding*
= $940 ÷ 200 shares = $4.70 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $400 ÷ $2 per share = 200 shares

180. Mikolajczyk Corporation's net income for the most recent year was $1,379,000. A
total of 100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $1.15 per share
and dividends on preferred stock were $1.30 per share.

Required:

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

Ans:

Earnings per share = (Net Income − Preferred Dividends)

÷ Average number of common shares outstanding
= ($1,379,000 − $260,000) ÷ 100,000 shares = $11.19 per share
181. Hoa Corporation's net income last year was $7,460,000. The dividend on common
stock was $8.40 per share and the dividend on preferred stock was $4.30 per share.
The market price of common stock at the end of the year was $78.90 per share.
Throughout the year, 500,000 shares of common stock and 100,000 shares of preferred
stock were outstanding.

Required:

Compute the price-earnings ratio. Show your work!

Ans:

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

= $78.90 ÷ $14.06 = 5.61
*Earnings per share
= (Net Income - Preferred Dividends) ÷ Average number of common shares
outstanding = ($7,460,000 - $430,000) ÷ 500,000 shares = $14.06 per share

182. Dupas Corporation's net income last year was $7,330,000. The dividend on common
stock was $12.70 per share and the dividend on preferred stock was $1.70 per share.
The market price of common stock at the end of the year was $47.20 per share.
Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred
stock were outstanding.

Required:

Compute the dividend payout ratio. Show your work!

Ans:

Dividend payout ratio = Dividends per share ÷ Earnings per share*

= $12.70 ÷ $13.98 = 0.91
*Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding
= ($7,330,000 − $340,000) ÷ 500,000 shares = $13.98 per share
183. Last year, Sheline Corporation's dividend on common stock was $13.00 per share and
the dividend on preferred stock was $2.10 per share. The market price of common
stock at the end of the year was $68.60 per share.

Required:

Compute the dividend yield ratio. Show your work!

Ans:

Dividend yield ratio = Dividends per share ÷ Market price per share
= $13.00 ÷ $68.60 = 0.19

184. Allaman Corporation's most recent income statement appears below:

Sales (all on account) ................................ $760,000

Cost of goods sold ..................................... 450,000
Gross margin ............................................. 310,000
Selling and administrative expense ........... 100,000
Net operating income ................................ 210,000
Interest expense ......................................... 40,000
Net income before taxes ............................ 170,000
Income taxes (30%) ................................... 51,000
Net income ................................................ $119,000

The beginning balance of total assets was $930,000 and the ending balance was
$970,000.

Required:

Compute the return on total assets. Show your work!

 Ans:

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

= $147,000 ÷ $950,000 = 15.5%
*Adjusted net income = Net income + [Interest expense × (1−Tax rate)]
= $119,000 + 40,000 × (1 − 0.30) = $147,000
**Average total assets = ($930,000 + $970,000) ÷ 2 = $950,000

185. Excerpts from Orr Corporation's most recent balance sheet appear below:

Year 2 Year 1
Preferred stock ....................................................... $ 200,000 $ 200,000
Common stock ....................................................... 400,000 400,000
Additional paid-in capital–common stock ............ 390,000 390,000
Retained earnings .................................................. 420,000 350,000
Total stockholders’ equity ..................................... $1,410,000 $1,340,000

Net income for Year 2 was $147,000. Dividends on common stock were $50,000 in
total and dividends on preferred stock were $27,000 in total.

Required:

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

Ans:

Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity* = ($147,000 − $27,000) ÷ $1,175,000 =
10.2%
*Average common stockholders' equity = ($1,210,000 + $1,140,000) ÷ 2 = $1,175,000
186. Data from Speir Corporation's most recent balance sheet appear below:

Preferred stock ....................................................... $ 200,000

Common stock ....................................................... 300,000
Additional paid-in capital–common stock ............ 380,000
Retained earnings .................................................. 490,000
Total stockholders’ equity ..................................... $1,370,000

A total of 150,000 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!

Ans:

Book value per share = Common stockholders' equity ÷ Number of common shares
outstanding = $1,170,000 ÷ 150,000 shares = $7.80 per share
187. Financial statements for Rarick Company appear below:

Rarick Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities .......................... $ 120 $ 120
Accounts receivable, net .................................... 180 150
Inventory ............................................................ 100 100
Prepaid expenses ................................................ 10 20
Total current assets ................................................ 410 390
Noncurrent assets:
Plant & equipment, net ....................................... 1,830 1,780
Total assets ............................................................ $2,240 $2,170

Current liabilities:
Accounts payable ............................................... $ 130 $ 150
Accrued liabilities .............................................. 30 50
Notes payable, short term ................................... 270 270
Total current liabilities .......................................... 430 470
Noncurrent liabilities:
Bonds payable .................................................... 310 300
Total liabilities ....................................................... 740 770
Stockholders’ equity:
Preferred stock, $10 par, 10% ............................ 100 100
Common stock, $5 par ....................................... 240 240
Additional paid-in capital–common stock ......... 250 250
Retained earnings ............................................... 910 810
Total stockholders’ equity ..................................... 1,500 1,400
Total liabilities & stockholders’ equity ................. $2,240 $2,170
 Rarick Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account) ............................................ $2,400
Cost of goods sold ................................................. 1,680
Gross margin ......................................................... 720
Selling and administrative expense ....................... 280
Net operating income ............................................ 440
Interest expense ..................................................... 30
Net income before taxes ........................................ 410
Income taxes (30%) ............................................... 123
Net income ............................................................ $ 287

Required:

Compute the following for Year 2:

a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.

Ans:

a. Current ratio = Current assets ÷ Current liabilities = $410 ÷ $430 = 0.95

b. Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $430 = 0.70

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-

term notes receivable = $120 + $180 = $300

c. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $2,400 ÷ $165 = 14.55

*Average accounts receivable = ($180 + $150) ÷ 2 = $165

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 ÷ 14.55 = 25.1 days
 d. Inventory turnover = Cost of goods sold ÷ Average inventory*
= $1,680 ÷ $100 = 16.80

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

e. Times interest earned = Net operating income ÷ Interest expense

= $440 ÷ $30 = 14.67

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

= $740 ÷ $1,500 = 0.49

LO: 3,4
188. Carleton Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash .................................................................... $ 30 $ 110
Accounts receivable ........................................... 210 260
Inventory ............................................................ 190 170
Prepaid expenses ................................................ 70 70
Total current assets ................................................ 500 610
Plant and equipment, net ....................................... 810 740
Total assets ............................................................ $1,310 $1,350

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 140 $ 150
Accrued liabilities .............................................. 30 30
Notes payable, short term ................................... 40 40
Total current liabilities .......................................... 210 220
Bonds payable ....................................................... 190 240
Total liabilities ....................................................... 400 460
Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. 100 100
Common stock, $2 par value .............................. 400 400
Additional paid-in capital–common stock ......... 130 130
Retained earnings ............................................... 280 260
Total stockholders’ equity ..................................... 910 890
Total liabilities & stockholders’ equity ................. $1,310 $1,350
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,260
Cost of goods sold ................................................. 770
Gross margin ......................................................... 490
Selling and administrative expense ....................... 400
Net operating income ............................................ 90
Interest expense ..................................................... 26
Net income before taxes ........................................ 64
Income taxes (30%) ............................................... 19
Net income ............................................................ $ 45

Required:

Compute the following for Year 2:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.

Ans:

a. Working capital = Current assets − Current liabilities = $500 thousand − $210

thousand = $290 thousand

b. Current ratio = Current assets ÷ Current liabilities = $500 ÷ $210 = 2.38

c. Acid-test ratio = Quick assets* ÷ Current liabilities = $240 ÷ $210 = 1.14

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-
term notes receivable = $30 + $0 + $210 = $240

d. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $1,260 ÷ $235 = 5.36
*Average accounts receivable = ($210 + $260) ÷ 2 = $235

e. Average collection period = 365 days ÷ Accounts receivable turnover (see

above) = 365 days ÷ 5.36 = 68.1 days
 f. Inventory turnover = Cost of goods sold ÷ Average inventory*
= $770 ÷ $180 = 4.28
*Average inventory = ($190 + $170) ÷ 2 = $180

g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 4.28 = 85.3 days

189. Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars)
appear below:
Year 2 Year 1
Current assets:
Cash ............................................ $ 70 $140
Accounts receivable ................... 250 280
Inventory .................................... 150 140
Prepaid expenses ........................ 20 20
Total current assets ........................ $490 $580
Current liabilities:
Accounts payable ....................... $150 $170
Accrued liabilities ...................... 90 90
Notes payable, short term ........... 80 80
Total current liabilities .................. $320 $340

Sales on account during the year totaled $1,320 thousand. Cost of goods sold was
$730 thousand.

Required:

Compute the following for Year 2:

a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
 Ans:

a. Working capital = Current assets − Current liabilities = $490 thousand − $320

thousand = $170 thousand

b. Current ratio = Current assets ÷ Current liabilities = $490 ÷ $320 = 1.53

c. Acid-test ratio = Quick assets* ÷ Current liabilities = $320 ÷ $320 = 1.00

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-
term notes receivable = $70 + $0 + $250 = $320

d. Accounts receivable turnover = Sales on account ÷ Average accounts

receivable* = $1,320 ÷ $265 = 4.98
*Average accounts receivable = ($250 + $280) ÷ 2 = $265

e. Average collection period = 365 days ÷ Accounts receivable turnover (see

above) = 365 days ÷ 4.98 = 73.3 days

f. Inventory turnover = Cost of goods sold ÷ Average inventory* = $730 ÷ $145

= 5.03
*Average inventory = ($150 + $140) ÷ 2 = $145

g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.03 = 72.6 days

190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are
$570,000, its total current liabilities are $270,000, its long-term liabilities are
$360,000, and its stockholders' equity is $240,000.

Required:

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

Ans:

Working capital = Current assets − Current liabilities = $300,000 − $270,000 =

$30,000
191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are
$680,000, its total current liabilities are $270,000, its long-term liabilities are
$460,000, and its stockholders' equity is $260,000.

Required:

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

Ans:

Current ratio = Current assets ÷ Current liabilities = $310,000 ÷ $270,000 = 1.15

192. Data from Furnia Corporation's most recent balance sheet appear below:

Cash ................................... $13,000

Marketable securities ......... $21,000
Accounts receivables ......... $32,000
Inventory ........................... $52,000
Prepaid expenses ............... $16,000
Current liabilities ............... $118,000

Required:

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

Ans:
Acid-test ratio = Quick assets* ÷ Current liabilities = $66,000 ÷ $118,000 = 0.56
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $13,000 + $21,000 + $32,000 = $66,000
193. Cozzolino Corporation has provided the following data:

This Year Last Year

Accounts receivable .......... $118,000 $123,000
Inventory ........................... $141,000 $165,000
Sales on account ................ $687,000
Cost of goods sold ............. $455,000

Required:

Compute the accounts receivable turnover for this year. Show your work!

Ans:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $687,000 ÷ $120,500 = 5.70
*Average accounts receivable = ($118,000 + $123,000) ÷ 2 = $120,500

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

This Year Last Year

Accounts receivable .......... $118,000 $103,000
Inventory ........................... $164,000 $173,000
Sales on account ................ $727,000
Cost of goods sold ............. $481,000

Required:

Compute the average collection period for this year:

 Ans:

Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 days ÷ 6.58 = 55.5 days
*Accounts receivable turnover = Sales on account ÷ Average accounts receivable** =
$727,000 ÷ $110,500 = 6.58
**Average accounts receivable = ($118,000 + $103,000) ÷ 2 = $110,500

195. Hsieh Corporation has provided the following data:

This Year Last Year

Accounts receivable .......... $104,000 $115,000
Inventory ........................... $150,000 $157,000
Sales on account ................ $879,000
Cost of goods sold ............. $575,000

Required:

Compute the inventory turnover for this year:

Ans:

Inventory turnover = Cost of goods sold ÷ Average inventory*

= $575,000 ÷ $153,500 = 3.75
*Average inventory = ($150,000 + $157,000) ÷ 2 = $153,500
196. Data from Buttler Corporation's most recent balance sheet and income statement
appear below:

This Year Last Year

Accounts receivable .......... $134,000 $138,000
Inventory ........................... $151,000 $171,000
Sales on account ................ $864,000
Cost of goods sold ............. $675,000

Required:

Compute the average sale period for this year:

Ans:

Average sale period = 365 days ÷ Inventory turnover*

= 365 days ÷ 4.19 = 87.1 days
*Inventory turnover = Cost of goods sold ÷ Average inventory*
= $675,000 ÷ $161,000 = 4.19
**Average inventory = ($151,000 + $171,000) ÷ 2 = $161,000
197. Erke Corporation's most recent balance sheet and income statement appear below:

Statement of Financial Position

December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash .................................................................... $ 130 $ 160
Accounts receivable ........................................... 120 110
Inventory ............................................................ 90 100
Prepaid expenses ................................................ 20 20
360
Total current assets ................................................ 390
Plant and equipment, net ....................................... 890 840
Total assets ............................................................ $1,250 $1,230

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable ............................................... $ 190 $ 180
Accrued liabilities .............................................. 70 60
Notes payable, short term ................................... 40 40
Total current liabilities .......................................... 300 280
Bonds payable ....................................................... 130 150
Total liabilities ....................................................... 430 430
Stockholders’ equity:
Preferred stock, $100 par value, 5% .................. 100 100
Common stock, $2 par value .............................. 200 200
Additional paid-in capital–common stock ......... 130 130
Retained earnings ............................................... 390 370
Total stockholders’ equity ..................................... 820 800
Total liabilities & stockholders’ equity ................. $1,250 $1,230
 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account) ............................................ $1,150
Cost of goods sold ................................................. 710
Gross margin ......................................................... 440
Selling and administrative expense ....................... 358
Net operating income ............................................ 82
Interest expense ..................................................... 18
Net income before taxes ........................................ 64
Income taxes (30%) ............................................... 19
Net income ............................................................ $ 45

Required:

Compute the following for Year 2:

a. Times interest earned.
b. Debt-to-equity ratio.

Ans:

a. Times interest earned = Net operating income ÷ Interest expense

= $82 ÷ $18 = 4.56

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

= $430 ÷ $820 = 0.52

198. Froemming Corporation's net operating income last year was $193,000; its interest
expense was $22,000; its total stockholders' equity was $950,000; and its total
liabilities were $400,000.

Required:

Compute the following for Year 2:

a. Times interest earned.
b. Debt-to-equity ratio.
 Ans:

a. Times interest earned = Net operating income ÷ Interest expense

= $193,000 ÷ $22,000 = 8.77
b. Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $400,000 ÷ $950,000 = 0.42

199. Brandy Corporation has provided the following data from its most recent income
statement:

Net operating income .................... $51,000

Interest expense ............................. $37,000
Net income before taxes ................ $14,000
Income taxes .................................. $4,000
Net income .................................... $10,000

Required:

Compute the times interest earned ratio. Show your work!

Ans:

Times interest earned = Net operating income ÷ Interest expense

= $51,000 ÷ $37,000 = 1.38
200. Molony Corporation has provided the following data from its most recent balance
sheet:

Total assets .................................... $740,000

Total liabilities ............................... $610,000
Total stockholders’ equity ............. $130,000

Required:

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

Ans:

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

= $610,000 ÷ $130,000 = 4.69