Chapter 13 Questions and Answers PDF

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CHAPTER 13 QUESTIONS and ANSWERS 1) Which income statement line item had the largest percentage increase from 2018 to 2019? Answer: Depreciation Expense 50% Sales

2019 120,000

2018 100,000

Cost of Goods Sold

89,000

60,000

Depreciation Expense

30,000

20,000

Interest Expense

2,000

5,000

Calculations (120,000-100,000)/100,000 = 20% (80,000-60,000)/60,000 = 33% (30.000-20000)/20,000 = 50% (2,000-5,0000)/5,000 = (60)%

2) Ratio analysis allows you to evaluate how well a company has performed relative to other different-sized companies within the same industry. 3) Profitable ratios indicate a company’s ability to generate income in the current period. 4) Revenues were $1,000,000. Cost of Goods Sold was $750,000, and Net Income was $120,000. Net profit margin equals 12%. Solve: Net income divided by Net sales = Net profit margins 120,000 / 1,000,000 = 12% 5) Directly improves the net profit margin decrease in expenses relative to sales, increase in sales relative to expenses. 6) This year, Canco had net income of $20,000 and 100,000 shares of common stock issued and 95,000 weighted average number of shares outstanding. Earnings per share (EPS) equals 21% Solve: EPS = net income - preferred dividends / average outstanding common shares 20,000 – 0 /95,000 = 21% ??? 7) Asset turnover ratios includes receivable turnover and inventory turnover. 8) Recipes had Net sales of $120,000 and Cost of goods sold of $80,000 for the year. Accounts receivable was $10,000 at the beginning of the year and $14,000 at the end. Inventory was $18,000 at the beginning of the year and $22,000 at the end. Recipe’s receivable turnover ratio equals 10.0. Solve: $120,000/{$10,000+$14,000}/2) = 10.0 $120,000 / (24,000 / 2) = 10.0

$120,000/ (12,000) = 10.0 9) Net credit sales divided by average net receivables equals the receivables turnover ratio. Solve: Receivables turnover rate = Net sales credit/avg net receivables 10) The average days to collect receivables equals 365 days divided by receivable turnover ratio. Solve: Average days to collect = 365 days/ receivable turnover ratio 11) Inventors sales were $$20,000, Cost of goods sold was $150,000, and its inventory was $23,000 at the beginning of the year and $27,000 at the end. Its Accounts Payable was $20,000 at the end of the year. Its inventory turnover equals 6 times. Solve: Inventory Turnover Ration = Cost of Goods Sold/Average Inventory $150,000/((23,000+27,000=50,000)/2) = 6 12) Cost of goods sold divided by average accounts payable is the Accounts Payable Turnover ratio. Solve: Accounts Payable Turnover Ratio = Cost of Goods Sold/Average Accounts Payable 13) Liquidity ratio indicates a company’s chances for short-term survival, especially its ability to pay its currently-maturing obligations. 14) If Currants & Jams current ratio equals 2.0, current liabilities are $10,000, and long-term liabilities are $30,000, then its current assets equal $20,000. Solve: Current Ratio = Current Assets/Current Liabilities 2.0 = $20,000/10,000 15) Solvency Ratios a. debit-to-equity ratio b. Times interest earned ratio c. Cash coverage ration 16) If the cash coverage ratio is higher than the times interest earned ratio then, it is most likely that cash flows from operating activities was greater than net income and interest expense was greater than interest paid during the period. 17) The debit-to-equity ratio equals Solve: Debit-to-equity = Total Liabilities/Total Stockholders’ Equity

18) Price/earnings ratio and dividend yield ratio are referred to as market ratios. 19) Stockup has a P/E ratio of 20 and a stock price of $50. What is Stockup’s earning per share? $2.50 Solve: Earnings per share = Stock Price/Price & Earning Ratio 20) A decrease in the dividend yield ratio may be caused by a decrease in the dividends per share, increase in market price per share. 21) A company that begins to accept major credit cards and discontinues its own credit card may expect to see a(n) decrease in its average days to collect receivables, increase in its receivable turnover ratio. 22) An extremely high inventory turnover ratio most likely indicates lost sales because desired inventory was not in stock. 23)The food industry would expect to have the highest inventory turnover. 24) The following will help to minimize the amount invested in the operating cycle. a. lower average days to sell inventory b. higher inventory turnover ratio c. lower average days to collect receivables 25) If a company has a significantly higher current ratio in comparison to competitors in the same industry, then you may conclude that the company has too many resources in inefficient current assets. 26) Kwikee Lube’s partial balance at Dec 31 includes the following: Cash 0f $8,000. Marketable securities of $2,000, Net accounts receivable of $5000, Inventory of $12000. Accounts payable of $10,000 and Notes payable (due in 2 years) of $20,000, Kwikee Lube’s quick ratio equals 1.5. Solve: Quick ratio= Cash & Cash equivalents + Net account receivable/Current liabilities 8,000 + 2,000 + 5,000 (omit inventory)/10,000 = 1.5 27) The ratio of the sum of cash and cash equivalents dividend by current liabilities is call the cash ratio. 28) Times Inc’s times interest earned equals 3.0 times. It had Net income of $10,000 and $0 income tax expense. Interest expense must equal $5,000. Solve: Times interest earned ratio = Net Income + Interest Expense + Income Tax Expense/Interest expense 3.0 = $10,000 + 0 + X/X???

29) Company more likely to face bankruptcy in the near future: Answer: Company A – current ration of 0.5, debit-to-ratio of 5.0, and times interest earned of 0.4. 30) Following would improve a current ration that is now 1.2: Answers: Issuing stock for cash, selling long-term assets for cash 31) Following will improve a company’s quick ratio. a. issuing a two-year note payable for cash b. issuing stock for cash c. selling land for cash Solve: Quick ratio = quick assets/current liabilities Quick assets = Current Assets – inventories 32) The cash ratio measures the amount of cash & cash equivalents for every dollar of current liabilities. 33) For the year ended Dec 31 income statement, Terrier had Sales of $100,000, interest expense of $6,000, Net income of $10,000. Its statement of cash flows included Interest Paid of $5,0000 and Cash flows from operating activities of $28,000. The Terrier’s cash coverage ratio is 5.6 times. Solve: Cash Coverage Ratio = Cash Flows from Operating Activities/Interest Paid $28,000/$5000 = 5.6 34) Analysts use only the ratios that are relevant to a particular decision when evaluating a company’s performance. The following have a meaningful relationship that most likely would be useful to an analyst. a. Cost of goods sold/average inventory b. Gross profit/net sales c. Net income/net sales 35) Profitability ratios include a. Return on equity b. Net profit margin 36) Squid Roe had Sales of $200,000, Net income of $15,000 and Net Cash from Operating Activities of $14,000 during the year. At Dec 31, its Average Common Stockholders’ Equity was $62,000, and its average shares outstanding was 50,000 shares. It has no preferred stock. It returns on equity equals 24 percent. Solve: Return on Equity = Net Income/Average total Stockholders’ Equity

$15,000/$62,500 = 24% 37) The following will cause an increase in a company’s return on equity ratio. a. an increase in net income b. repurchasing treasury stock 38) Statement best explains an increase in a company’s return on assets ratio. Answer: The company utilized fewer assets while increasing its net income. 39) Interest expense is added to net income, net of taxes in the numerator of the return on assets ratio in order to remove the effect of financing provided by creditors and to be consistent with the denominator which included resources provided by both creditors and owners. 40) A positive financial leverage percentage occurs when the return on equity is greater than the return on assets. 41) Squid Rod had Sales of $200,000, Net income of $15,000 during the year, At Dec 31, its average total assets were $450,000 and average total shareholders’ equity is $150,000. Its financial leverage percentage equals 7%. Solve: Financial leverage percentage = Return on Equity – Return on Assets Return on Equity 15,000/150,000 = .10 Return on Assets 15,000/450,000 = .03 .07 42) Doolittle & Baroque has an earning quality ration of 0.6, while Mega Star has an earning quality ratio of 1.5. What may explain the difference in their ratios? a. Mega Star has higher depreciation expense relative to net income b. Mega Star is producing more cash flow than its net income 43) Cash flows from operating activities divided by net income equals quality income ratio. 44) Puffin Pastry had Net Sales Revenue of $90,000 and Net Income of $10,000 during 2019. At December 31, 2018, its total assets were $100,000, and its net fixed assets wee $40,000. At Dec. 31 2019, its total assets were $200,000, and its fixed assets were $80,000. Puffin’s asset turnover ratio equals .60. Solve: Total Asset Ratio = Net Sales Revenue/Average Total Assets

$90,000/(($100,000 + $200,000)/2) = 0.60 44) Puffin Pastry had Net Revenue of $90,000 and Net Income of $10,000 during 2019. At December 31, 2018, its total assets were $100,000, and its net fixed assets wee $40,000. At Dec. 31 2019, its total assets were $200,000, and its fixed assets were $80,000. Puffin’s fixed asset turnover ratio equals 1.50. Solve: Fixed Asset Ratio = Net Sales Revenue/Average Net Fixed Assets $90,000/(($40,000 + $80,000)/2) = 1.50 45) Puffin fixed asset turnover was 0.9 while Muffin Tops fixed asset turnover was 0.6. The following is true about Puffin compared with Muffin. a. Puffin generated more sales per dollar of fixed assets. 46) A decrease in the dividend yield ratio may be caused by all the below. a. An increase in the market price per share b. A decrease in the dividends per share...