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Exam 12: Financial Statement Analysis

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Question 51

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When a company pays a bill from a plumber for previous services on account:

A) Its debt to equity ratio decreases.
B) Its acid-test ratio always remains unchanged.
C) Its current ratio always remains unchanged.
D) All of the other options are correct.

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Question 52

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If an item meets one but not both criteria for extraordinary item treatment, it is correctly excluded from extraordinary items and included with other revenue and expenses.

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Question 53

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Given the information below, what is the company's gross profit? $\begin{array} { | l | r | } \hline \text { Sales Revenue } & \$ 320,000 \\\hline \text { Accounts Receivable } & \$ 50,000 \\\hline \text { Ending Inventory } & \$ 100,000 \\\hline \text { Cost of Goods Sold } & \$ 250,000 \\\hline \text { Sales Returns } & \$ 20,000 \\\hline\end{array}$

We report any profits or losses on discontinued operations in the current year, separately from profits and losses on the portion of the business that will continue.

Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The asset turnover is:

Explain why ratios that compare an income statement account with a balance sheet account should express the balance sheet account as an average of the beginning and ending balances.

Return on equity is calculated by dividing the stock return by average stockholders' equity.

If the base-year amount is zero, we can't calculate a percentage change under horizontal analysis.

Value stocks have lower share prices in relationship to their fundamental ratios, and therefore, trade at lower PE ratios.

Paul Pierce Enterprises reports net income of $800,000, average total assets of $2,400,000, and average total liabilities of $400,000. Calculate the return on asset and return on equity ratios.

Assume a company's current ratio and acid-test ratio are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

The current ratio is calculated as:

Horizontal analysis examines trends in a company:

A low inventory turnover ratio usually is a positive sign and indicates that inventory is selling quickly.

We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time.

Which of the following ratios is most useful in evaluating liquidity?

Assume a company's sales are $1.6 million in 2011, $1.8 million in 2012, and $1.7 million in 2013. What is the percentage change from 2011 to 2012? What is the percentage change from 2012 to 2013? Be sure to indicate whether the percentage change is an increase or a decrease.

Nerf Mania reports net income of $500,000, net sales of $4,000,000, and average assets of $2,000,000. The profit margin is:

Perform a horizontal analysis on the following information providing both the dollar amount and percentage change: $\begin{array} { l r r | } \hline \text { Cash } & { \frac { \mathbf { 2 0 1 3 } } { 500,000 } } & \stackrel { \underline { \mathbf { 2 0 1 2 } } } { 200,000 } \\\text { Accounts receivable } & 900,000 & 800,000 \\\text { Inventory } & 700,000 & 500,000 \\\text { Long-term assets } & 2,200,000 & 2,500,000 \\\text { Total assets } & \$ 4,300,000 & \$ 4,000,000 \\\hline\end{array}$

Stealth Company's 2013 inventory turnover is: