Test Bank Chapter 18 FS Analysis PDF

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Chapter 18“How Well Am I Doing?” Financial Statement AnalysisTrue/False1.FMediumIn determining whether a company's financial condition is improving or deteriorating over time, vertical analysis of financial statement data would be more useful than horizontal analysis. T Easy Trend percentages state ...

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185. Medium

NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the same question. Financial statements for Qiang Company appear below: Qiang Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 170 Accounts receivable, net ................... 130 Inventory .................................. 130 Prepaid expenses ........................... 60 Total current assets ..................... 490 Noncurrent assets: Plant & equipment, net ..................... 1,900 Total assets ................................. $2,390 Current liabilities: Accounts payable ........................... $ 160 Accrued liabilities ........................ 50 Notes payable, short term .................. 80 Total current liabilities ............... 290 Noncurrent liabilities: Bonds payable .............................. 400 Total liabilities ........................ 690 Stockholders' equity: Preferred stock, $5 par, 10% ............... 120 Common stock, $5 par ....................... 180 Additional paid-in capital--common stock ... 120 Retained earnings .......................... 1,280 Total stockholders' equity ............... 1,700 Total liabilities & stockholders' equity ..... $2,390

Managerial Accounting, 9/e

19X5 $

160 100 130 70 460

1,880 $2,340

$

160 70 110 340 400 740

120 180 120 1,180 1,600 $2,340

212

Qiang Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$1,500 1,050 450 180 270 40 230 69 $ 161

Dividends during 19X6 totaled $61 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $50. Required: Compute the following for 19X6: a. Earnings per share of common stock. b. Price-earnings ratio. c. Dividend yield ratio. d. Return on total assets. e. Return on common stockholders' equity. f. Book value per share. Answer: a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding* = ($161 - $12) ÷ 36 = $4.14 *Number of common shares outstanding = Common stock ÷ Par value = $180 ÷ $5 = 36 b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above) = $50 ÷ $4.14 = 12.1

c. Dividend yield ratio = Dividends per share* 213Managerial Accounting, 9/e

÷ Market price per share = $1.36 ÷ $50.00 = 2.72% *Dividends per share = Common dividends ÷ Common shares** = $49 ÷ 36 = $1.36 **See above d. Return on total assets = Adjusted net income* ÷ Average total assets** = $189 ÷ $2,365 = 7.99% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $161 + [$40 x (1 - 0.30)] = $189 **Average total assets = ($2,390 + $2,340) ÷ 2 = $2,365 e. Return on common stockholders' equity = (Net income – Preferred dividends) ÷ Average common stockholders' equity* = ($161 - $12)÷$1,530 = 9.74% *Average common stockholders' equity = ($1,580 + $1,480) ÷ 2 = $1,530 f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,580 ÷ 36 = $43.89 *Number of common shares outstanding = Common stock ÷ Par value = $180 ÷ $5 = 36

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186. Medium

NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the same question. Financial statements for Qualle Company appear below: Qualle Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 130 Accounts receivable, net ................... 110 Inventory .................................. 170 Prepaid expenses ........................... 30 Total current assets ..................... 440 Noncurrent assets: Plant & equipment, net ..................... 1,890 Total assets ................................. $2,330 Current liabilities: Accounts payable ........................... $ 130 Accrued liabilities ........................ 40 Notes payable, short term .................. 250 Total current liabilities ............... 420 Noncurrent liabilities: Bonds payable .............................. 470 Total liabilities ........................ 890 Stockholders' equity: Preferred stock, $5 par, 10% ............... 100 Common stock, $10 par ...................... 160 Additional paid-in capital--common stock ... 170 Retained earnings .......................... 1,010 Total stockholders' equity ............... 1,440 Total liabilities & stockholders' equity ..... $2,330

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19X5 $

120 100 170 30 420

1,880 $2,300

$

130 50 290 470 500 970

100 160 170 900 1,330 $2,300

Qualle Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,300 1,610 690 270 420 50 370 111 $ 259

Dividends during 19X6 totaled $149 thousand, of which $10 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $280. Required: Compute the following for 19X6: a. Earnings per share of common stock. b. Price-earnings ratio. c. Dividend yield ratio. d. Return on total assets. e. Return on common stockholders' equity. f. Book value per share. Answer: a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding* = ($259 - $10) ÷ 16 = $15.56 *Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16 b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above) = $280 ÷ $15.56 = 18.0

c. Dividend yield ratio = Dividends per share* Managerial Accounting, 9/e

216

÷ Market price per share = $8.69 ÷ $280.00 = 3.10% *Dividends per share = Common dividends ÷ Common shares** = $139 ÷ 16 = $8.69 **See above d. Return on total assets = Adjusted net income* ÷ Average total assets** = $294 ÷ $2,315 = 12.70% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $259 + [$50 x (1 - 0.30)] = $294 **Average total assets = ($2,330 + $2,300) ÷ 2 = $2,315 e. Return on common stockholders' equity = (Net income – Preferred dividends) ÷ Average common stockholders' equity* = ($259 - $10)÷$1,285 = 19.38% *Average common stockholders' equity = ($1,340 + $1,230) ÷ 2 = $1,285 f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,340 ÷ 16 = $83.75 *Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16

217Managerial Accounting, 9/e

187. Medium

NOTE TO THE INSTRUCTOR: Questions 185, 186, and 187 are different versions of the same question. Financial statements for Quade Company appear below: Quade Company Statement of Financial Position December 31, 19X6 and 19X5 (dollars in thousands) 19X6 Current assets: Cash and marketable securities ............. $ 110 Accounts receivable, net ................... 150 Inventory .................................. 120 Prepaid expenses ........................... 80 Total current assets ..................... 460 Noncurrent assets: Plant & equipment, net ..................... 1,550 Total assets ................................. $2,010 Current liabilities: Accounts payable ........................... $ 130 Accrued liabilities ........................ 20 Notes payable, short term .................. 260 Total current liabilities ............... 410 Noncurrent liabilities: Bonds payable .............................. 380 Total liabilities ........................ 790 Stockholders' equity: Preferred stock, $5 par, 15% ............... 120 Common stock, $10 par ...................... 160 Additional paid-in capital--common stock ... 280 Retained earnings .......................... 660 Total stockholders' equity ............... 1,220 Total liabilities & stockholders' equity ..... $2,010

Managerial Accounting, 9/e

19X5 $

110 140 140 80 470

1,520 $1,990

$

130 40 270 440 400 840

120 160 280 590 1,150 $1,990

218

Quade Company Income Statement For the Year Ended December 31, 19X6 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses ....................... Net operating income ..................... Interest expense ......................... Net income before taxes .................. Income taxes (30%) ....................... Net income ...............................

$2,400 1,680 720 280 440 40 400 120 $ 280

Dividends during 19X6 totaled $210 thousand, of which $18 thousand were preferred dividends. The market price of a share of common stock on December 31, 19X6 was $230. Required: Compute the following for 19X6: a. Earnings per share of common stock. b. Price-earnings ratio. c. Dividend yield ratio. d. Return on total assets. e. Return on common stockholders' equity. f. Book value per share. Answer: a. Earnings per share = (Net Income - Preferred Dividends) ÷ Average number of common shares outstanding* = ($280 - $18) ÷ 16 = $16.38 *Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16 b. Price-earnings ratio = Market price per share ÷ Earnings per share (see above) = $230 ÷ $16.38 = 14.0

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c. Dividend yield ratio = Dividends per share* ÷ Market price per share = $12.00 ÷ $230.00 = 5.22% *Dividends per share = Common dividends ÷ Common shares** = $192 ÷ 16 = $12.00 **See above d. Return on total assets = Adjusted net income* ÷ Average total assets** = $308 ÷ $2,000 = 15.40% *Adjusted net income = Net income + [Interest expense x (1-Tax rate)] = $280 + [$40 x (1 – 0.30)] = $308 **Average total assets = ($2,010 + $1,990) ÷ 2 = $2,000 e. Return on common stockholders' equity = (Net income – Preferred dividends) ÷ Average common stockholders' equity* = ($280 - $18)÷$1,065 = 24.60% *Average common stockholders' equity = ($1,100 + $1,030) ÷ 2 = $1,065 f. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding* = $1,100 ÷ 16 = $68.75 *Number of common shares outstanding = Common stock ÷ Par value = $160 ÷ $10 = 16

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188. Medium

Condensed financial statements of Miller Company at the beginning and at the end of the current year are given below: Miller Company Balance Sheet End of Current Year Cash ........................... $ 10,000 Marketable securities .......... 20,000 Accounts receivable ............ 90,000 Inventories .................... 150,000 Plant and equipment, net ....... 280,000 Total assets ................ $550,000 Accounts payable ............... Accrued short-term liabilities Bonds payable .................. Preferred stock, 10%, $100 par Common stock, $10 par .......... Additional paid-in capital, common stock ................. Retained earnings .............. Total liabilities and equity

Beginning of Current Year $ 8,000 22,000 110,000 100,000 260,000 $500,000

$ 80,000 20,000 75,000 50,000 100,000

$ 60,000 25,000 75,000 50,000 100,000

50,000 175,000 $550,000

50,000 140,000 $500,000

Miller Company Condensed Income Statement For the Current Year Sales (all on account) ............ $650,000 Less cost of goods sold ........... 350,000 Gross margin ...................... 300,000 Less operating expenses ........... 200,000 Net operating income .............. 100,000 Less interest expense ............. 10,000 Net income before income taxes .... 90,000 Less income taxes ................. 40,000 Net income ........................ $ 50,000 The company paid total dividends of $15,000 during the year, of which $5,000 were to preferred stockholders. The market price of a share of common stock at the end of the year was $30.

221Managerial Accounting, 9/e

Required: On the basis of the information given above, fill in the blanks with the appropriate figures. Example: The current ratio at the end of the current year would be computed by dividing $270,000 by $100,000 a. The acid-test (quick) ratio at the end of the current year would be computed by dividing _______________ by _________________. b. The inventory turnover for the year would be computed by dividing _______________ by _________________. c. The debt-to-equity ratio at the end of the current year would be computed by dividing _______________ by _________________. d. The earnings per share of common stock would be computed by dividing _______________ by _________________. e. The accounts receivable turnover for the year would be computed by dividing _______________ by _________________. f. The times interest earned for the year would be computed by dividing _______________ by _________________. g. The return on common stockholders' equity for the year would be computed by dividing _______________ by _________________. h. The dividend yield would be computed by dividing _______________ by _________________. Answer: a. $120,000; b. $350,000; c. $175,000; d. $ 45,000; e. $650,000; f. $100,000; g. $ 45,000; h. $1; $30

$100,000 $125,000 $375,000 10,000 shares $100,000 $ 10,000 $307,500

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222

189. Hard CMA adapted

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

1993

1992

1991

Return on common stockholders’ equity ......... 13.03 Average sale period ............ 51.16 Times interest earned .......... 3.87 Price-earnings ratio ........... 10.96 Debt-to-equity ratio ........... 0.50 Accounts receivable turnover ... 6.98 Current ratio .................. 1.65 Dividend yield ratio ........... 2.08

13.02 47.29 3.46 11.23 0.46 7.25 1.95 2.06

12.98 42.15 3.28 11.39 0.48 7.83 1.70 2.12

Industry Average 12.96 38.63 3.56 11.54 0.57 7.78 2.30 2.25

Required: Using the information provided above for Raritron Industries: A. 1. Identify the two ratios from the above list that would be of most interest to short-term creditors. 2. Explain what these two ratios measure. 3. What do these two ratios indicate about Shelzo Inc.? B. 1. Identify the three ratios from the above list that would be of most interest to stockholders. 2. Explain what these three ratios measure. 3. What do these three ratios indicate about Shelzo Inc.? C. 1. Identify the two ratios from the above list that would be of most interest to long-term creditors. 2. Explain what these two ratios measure. 3. What do these two ratios indicate about Shelzo Inc.? Answer: A. 1. Two ratios that would be of most interest to short-term creditors would be the average sale period and the current ratio. 2. The average sale period relates the average amount of inventory to the cost of goods sold. This ratio measures the length of time it takes on average to sell inventory and is a gauge of how well the company manages its inventory. The current ratio is calculated by dividing current assets by current liabilities. This ratio measures short-run solvency, i.e., the ability to meet current obligations.

223Managerial Accounting, 9/e

3. For Shelzo Inc., the average sale period has been increasing and is well above the industry average, while the current ratio has been below the industry average. Both of these ratios indicate that there may be problems with the company’s liquidity position. This could be caused by poor inventory control. B. 1. The three ratios that would be of most interest to common stockholders are the return on common stockholders’ equity, the price-earnings ratio, and the dividend yield ratio. 2. The return on common stockholders’ equity is a measure of how effectively the company has used the stockholders’ investment in the company to generate profits. The priceearnings ratio provides a measure of how the stock market perceives the company’s future earnings prospects. The higher the ratio, the more favorable the future looks for the company. The dividend yield ratio tells us what proportion of the company’s profits are paid out as cash dividends to common stockholders. 3. These three ratios are close to the industry averages and there are no discernible significant trends. C. 1. The two ratios that would be of most interest to longterm creditors are times interest earned and the debt-toequity ratio. 2. Times interest earned is earnings before interest expense and taxes divided by interest expense. This ratio measures debt paying ability. If stable, the company will be able to refinance or obtain new funds at reasonable rates. The debt-to-equity ratio measures the relative proportions of debt and equity in the company’s capital structure. The lower the level of the debt-to-equity ratio, the more security long-term debtors have. 3. For Shelzo Inc., times interest earned has been improving and is currently above the industry average, indicating that the company should be able to borrow additional funds if needed. The company’s debt-to-equity ratio is below the industry average which also indicates the company has the capacity to perhaps take on additional debt.

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224

190. Medium

Financial statements for Lowe Company appear below: Lowe Company Statement of Financial Position December 31, Year 2 and Year 1 (dollars in thousands) Year 2 Cash........................................ $ 45 Accounts receivable, net ................... 38 Inventory .................................. 67 Long-term investments....................... 162 Land........................................ 128 Building.................................... 98 Total assets.............................. $ 538

Year 1 $ 30 40 60 150 100 50 $ 430

Accounts payable ........................... $ 36 Notes payable, short term .................. 24 Bonds payable............................... 35 Mortgage payable............................ 100 Preferred stock,12%......................... 100 Common stock................................ 195 Retained earnings .......................... 48 Total liabilities & stockholders' equity.. $ 538

$

40 30 50 -0100 170 40 $ 430

Lowe Company Income Statement For the Year Ended December 31, Year 2 (dollars in thousands) Sales (all on account) ................... Cost of goods sold ....................... Gross margin ............................. Operating expenses (including interest expense of $5,000)...................... Net income before taxes .................. Income taxes (40%) ....................... Net income ...............................<...