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Exam 9: Financial Statement Analysis

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Question 91

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Financial ratios can be used to assess which of the following aspects of a firm's performance?

A) Liquidity
B) Solvency
C) Profitability
D) All of these answers are correct.

E) A) and C)
F) A) and B)

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Question 92

Multiple Choice

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Which of the following is a potential limitation of financial statement analysis?

A) Lack of comparability of firms in different industries
B) The impact of changing economic conditions
C) The impact of having more than one acceptable alternative accounting principle for accounting for a given transaction or economic event
D) All of these answers are correct.

E) A) and B)
F) A) and C)

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Question 93

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A banker may perform a financial ratio analysis to assess a firm's ability to repay debt in a timely manner.

Common methods of financial statement analysis include all of the following except:

The Poole Company reported the following income for Year 2: $\begin{array}{lr}\text {Sales}&\$38,000\\\text {Cost of goods sold}&\underline{9,600}\\\text {Gross margin}&\$28,400\\\text {Selling and administrative expense}&\underline{16,600}\\\text { Operating income } & \$ 16,800\\\text { Interest expense } & \underline{5,600} \\ \text {Income before taxes } & \$11,200 \\\text { Income tax expense } & \underline{ 3,360} \\\text { Net income } & \underline{\$ 7,840}\end{array}$ What is the company's net margin? (Round your answer to 2 decimal places.)

The following balance sheet information was provided by Western Company: $\begin{array}{lrr}\text { Assets } & \text { Year 2 } &{\text { Year 1 }} \\\text { Cash } & \$ 4,000 & \$ 2,000 \\\text { Accounts receivable } & 15,000 & 12,000 \\\text { Inventory } & \$ 35,000 & \$ 38,000\end{array}$ Assuming Year 2 net credit sales totaled $270,000, what was the company's average days to collect receivables? (Use 365 days in a year. Do not round your intermediate calculations.)

The return on investment measure is also referred to as:

The following information applies to Acorn Construction Company (ACC): $\begin{array}{lrr}&\text { Year } 2&\text { Year } 1\\\text { Net sales } & \$ 880,000 & \$ 600,000 \\\text { Income before interest and taxes } & 127,500 & 84,000 \\\text { Net income } & 59,000 & 52,000 \\\text { Interest expense } & 24,500 & 15,000 \\\text { Stockholders' equity, December } 31 & 810,300 & 725,000 \\\text { Common stock } & 750,300 & 700,000 \\\text { Preferred stock dividends } & 24,000 & 24,000\end{array}$ Information on the number of shares outstanding is provided below: Average number of shares outstanding Year 1 $\quad$$\quad$ 38,000 Average number of shares outstanding year 2 $\quad$$\quad$ 33,000 Required: Compute the following ratios for ACC for Year 2 and Year 1: Number of times interest is earnedEarnings per sharePrice-earnings ratio (Market prices: Year 2 $17.50 per share, Year 1 $15.00 per share)Return on equityNet margin

Which ratios measure a company's long-term debt-paying ability and its financing structure?

The most frequently quoted measure of earnings performance is the stockholders' equity ratio.

Profitability ratios attempt to assess the company's ability to generate earnings.

The quick ratio, although similar to the current ratio, is more conservative.