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financial accounting 11th edition

Questions and Answers of Financial Accounting 11th Edition

A measure of a company’s success in earning a return for all providers of capital. True/False
The relationship between net sales and average total assets. True/False
The relationship between dividends and the market price of a company’s stock. True/False
The use of borrowed funds and amounts contributed by preferred stockholders to earn an overall return higher than the cost of these funds. True/False
An income statement measure of the ability of a company to meet its interest payments. True/False
A statement of cash flows measure of the ability of a company to meet its interest and principal payments. True/False
How well management is using company resources to earn a return on the funds invested by various groups. True/False
Aline item on the income statement to reflect any gains or losses that arise from an event that is both unusual in nature and infrequent in occurrence. True/False
A line item on the income statement to reflect any gains or losses from the disposal of a segment of the business as well as any net income or loss from operating that segment. True/False
A stricter test of liquidity than the current ratio; excludes inventory and prepayments from the numerator. True/False
Current assets minus current liabilities. True/False
The ratio of current assets to current liabilities. True/False
A measure of the average age of accounts receivable. True/False
A measure of the ability to pay current debts from operating cash flows. True/False
A measure of the number of times accounts receivable are collected in a period. True/False
A measure of how long it takes to sell inventory. True/False
The length of time from the purchase of inventory to the collection of any receivable from the sale. True/False
A measure of the number of times inventory is sold during a period. True/False
A comparison of various financial statement items within a single period with the use of common-size statements. True/False
The nearness to cash of the assets and liabilities. True/False
A comparison of financial statement items over a period of time. True/False
Two companies are in the same industry. Company A uses the LIFO method of inventory valuation, and Company B uses FIFO. What difficulties does this present when comparing the two companies? (Appendix)
You are told to compare the company’s results for the year, as measured by various ratios, with one of the published surveys that arranges information by industry classification.What are some of
What types of problems does inflation cause when financial statements are analyzed? (Appendix)
Distinguish between horizontal and vertical analysis. Why is the analysis of common-size statements called vertical analysis? Why is horizontal analysis sometimes called trend analysis? (Appendix)
Acompany experiences a 15% increase in sales over the previous year. However, gross profit actually decreased by 5%from the previous year. What are some of the possible causes for an increase in
A company’s total current assets have increased by 5% over the prior year. Management is concerned, however, about the composition of the current assets. Why is the composition of current assets
Ratios were categorized in the chapter according to their use in performing three different types of analysis. What are the three types of ratios? (Appendix)
Describe the operating cycle for a manufacturing company.How would the cycle differ for a retailer? (Appendix)
What accounts for the order in which current assets are presented on a balance sheet? (Appendix)
A company has a current ratio of 1.25 but an acid-test(or quick) ratio of only 0.65. How can this difference in the two ratios be explained? What concerns might you have about this company? (Appendix)
Explain the basic concept underlying all turnover ratios.Why is it advisable in computing a turnover ratio to use an average in the denominator (for example, average inventory)? (Appendix)
Sanders Company’s accounts receivable turned over nine times during the year. The credit department extends terms of 2/10, net 30. Does the turnover ratio indicate any problems that management
The turnover of inventory for Ace Company has slowed from 6.0 times per year to 4.5. What are some possible explanations for this decrease? (Appendix)
How does the operating cycle for a manufacturer differ from the operating cycle for a service company (e.g., an airline?) (Appendix)
What is the difference between liquidity analysis and solvency analysis? (Appendix)
Why is the debt service coverage ratio a better measure of solvency than the times interest earned ratio? (Appendix)
A friend tells you that the best way to assess solvency is by comparing total debt to total assets. Another friend says that solvency is measured by comparing total debt to total
A company is in the process of negotiating with a bank for an additional loan. Why will the bank be interested in the company’s debt service coverage ratio? (Appendix)
What is the rationale for deducting dividends when computing the ratio of cash flow from operations to capital expenditures? (Appendix)
The rate of return on assets ratio is computed by dividing net income and interest expense, net of tax, by average total assets. Why is the numerator net income and interest expense, net of tax,
A company has a return on assets of 14% and a return on common stockholders’ equity of 11%. The president of the company has asked you to explain the reason for this difference.What causes the
What is meant by the “quality” of a company’s earnings?Explain why the price/earnings ratio for a company may indicate the quality of earnings. (Appendix)
Some ratios are more useful for management, whereas others are better suited to the needs of outsiders, such as stockholders and bankers. What is an example of a ratio that is primarily suited to
The needs of service-oriented companies in analyzing financial statements differ from those of productoriented companies. Why is this true? Give an example of a ratio that is meaningless to a service
What is the reason for reporting discontinued operations and extraordinary items in a separate section of an income statement? (Appendix)
Types of Ratios Fill in the blanks to indicate whether each of the following ratios is concerned with a company’s liquidity (L), its solvency (S), or its profitability (P).1. Return on assets ratio
Accounts Receivable Turnover Company A reported sales during the year of $1,000,000. Its average accounts receivable balance during the year was $250,000. Company B reported sales during the same
Earnings per Share A company reported net income during the year of $90,000 and paid dividends of $15,000 to its common stockholders and $10,000 to its preferred stockholders. During the year, 20,000
Limitations in Ratio Analysis Asupplier is thinking of extending credit to a company but decides not to because the company’s current ratio is only 0.50. Do you agree with the supplier’s
Horizontal Analysis Fill in the blanks for each of the following statements.A comparison of financial statement items within a single period is called _________ analysis.A comparison of financial
Vertical Analysis Assume that your boss has asked you to prepare common-size financial statements. All accounts on the balance sheet should be stated as a percentage of which number? All accounts on
Liquidity Analysis For each of the following ratios, fill in the missing numerator. Ratio Current: Acid-Test: Accounts Receivable Turnover: Inventory Turnover: Current Liabilities Current Liabilities
Solvency Analysis Fill in the blank with the name of the ratio that would be used for each of the following situations. Ratio Measures the ability of the company to Meet its interest and principal
Profitability Analysis For each of the following ratios, indicate what adjustment must be made to net income in the numerator and whether the adjustment is an addition to (A) or a deduction from (D)
Other Income Statement Items Fill in the blank to indicate the line item that would appear on the income statement for each of the following events. Item on Income Statement Event Disposed of a
Accounts Receivable Analysis The following account balances are taken from the records of the Faraway Travel Agency:Faraway extends credit terms requiring full payment in 60 days, with no discount
Inventory Analysis The following account balances are taken from the records of Lewis Inc., a wholesaler of fresh fruits and vegetables:Required 1. Compute Lewis’s inventory turnover ratio for 2008
Accounts Receivable and Inventory Analyses for Coca-Cola and PepsiCo The following information was obtained from the 2006 and 2005 financial statements of Coca-Cola Company and Subsidiaries and
Liquidity Analyses for Coca-Cola and PepsiCo The following information was summarized from the balance sheets of the Coca-Cola Company and Subsidiaries at December 31, 2006, and PepsiCo Inc. and
Liquidity Analyses for McDonald’s and Wendy’s The following information was summarized from the balance sheets of McDonald’s Corporation andWendy’s International Inc. at December 31,
Solvency Analyses for IBM The following information was obtained from the comparative financial statements included in IBM’s 2006 annual report. (All amounts are in millions of dollars.)Required 1.
Solvency Analysis The following information is available from the balance sheets at the ends of the two most recent years and the income statement for the most recent year of Impact Company:Other
Return Ratios and Leverage The following selected data are taken from the financial statements of Evergreen Company:Required 1. Compute the following ratios for Evergreen Company:a. Return on salesb.
Relationships among Return on Assets, Return on Sales, and Asset Turnover A company’s return on assets is a function of its ability to turn over its investment (asset turnover) and earn a profit on
EPS, P/E Ratio, and Dividend Ratios The stockholders’ equity section of the balance sheet for Cooperstown Corp. at the end of 2008 appears as follows:Net income for the year was $1,300,000.
Earnings per Share and Extraordinary Items The stockholders’ equity section of the balance sheet for Lahey Construction Company at the end of 2008 is as follows:Required 1. Compute earnings per
Common-Size Balance Sheets and Horizontal Analysis Comparative balance sheets for Farinet Company for the past two years are as follows:Required 1. Using the format in Exhibit 13-5, prepare
Common-Size Income Statements and Horizontal Analysis Income statements for Mariners Corp. for the past two years are as follows:Required 1. Using the format in Exhibit 13-6, prepare common-size
What are the two major components of stockholders’ equity?Which accounts generally appear in each component? (Appendix)
Corporations disclose the number of shares authorized, issued, and outstanding. What is the meaning of each of those terms? What causes a difference between the number of shares issued and the number
Why do firms designate an amount as the par value of stock? Does par value indicate the selling price or market value of the stock? (Appendix)
If a firm has a net income for the year, will the balance in the Retained Earnings account equal the net income? What is the meaning of the balance of the account? (Appendix)
What is the meaning of the statement that preferred stock has a preference to dividends declared by the corporation?Do preferred stockholders have the right to dividends in arrears on preferred
Why might some stockholders be inclined to buy preferred stock rather than common stock? What are the advantages of investing in preferred stock? (Appendix)
Why are common shareholders sometimes called residual owners when a company has both common and preferred stock outstanding? (Appendix)
When stock is issued in exchange for an asset, at what amount should the asset be reported? How could the fair market value be determined? (Appendix)
What is treasury stock? Why do firms use it? Where does it appear on a corporation’s financial statements? (Appendix)
When treasury stock is bought and sold, the transactions do not result in gains or losses reported on the income statement.What account or accounts are used instead? Why are no income statement
Many firms operate at a dividend payout ratio of less than 50%. Why do firms not pay a larger percentage of income as dividends? (Appendix)
What is a stock dividend? How should it be recorded? (Appendix)
Would you rather receive a cash dividend or a stock dividend from a company? Explain. (Appendix)
What is the difference between stock dividends and stock splits? How should stock splits be recorded? (Appendix)
How is the book value per share calculated? Does the amount calculated as book value per share mean that stockholders will receive a dividend equal to the book value? (Appendix)
Can the market value per share of stock be determined by the information on the income statement? (Appendix)
What is the difference between a statement of stockholders’equity and a retained earnings statement? (Appendix)
Components of Stockholders’ Equity Nash Company has the following accounts among the items on its balance sheet at December 31, 2008:Required Develop the Stockholders’ Equity section of the
Stock Issuance Morris had the following transactions during 2008:1. Issued 2,000 shares of $10 par common stock for cash at $17 per share.2. Issued 1,000 shares of preferred stock to acquire land.
Cash Dividends At December 31, 2008, Black Company has the following:Common Stock, $10 par, 10,000 shares authorized, 9,000 issued, 8,000 outstanding Preferred Stock, $100 par, 8%, cumulative, 1,000
Stock Dividends and Stock Splits At December 31, 2008, Green Company and Blue Company have identical amounts of common stock and retained earnings as follows:Common Stock, $10 par, 50,000 shares
Develop Stockholders’ Equity Nash Company has the following accounts among the items on the balance sheet at January 1, 2008:During 2008, the company issued 500 shares of common stock at $14 per
Book Value per Share Deer Company has the following amounts in the Stockholders’ Equity category of the balance sheet at December 31, 2008:Required Determine the book value per share of the Deer
Solve for Unknowns The Stockholders’ Equity category of Zache Company’s balance sheet appears below.Required 1. Determine the missing values indicated by question marks.2. What was the cost per
Stock Issuance Horace Company had the following transactions during 2008, its first year of business.a. Issued 5,000 shares of $5 par common stock for cash at $15 per share.b. Issued 7,000 shares of
Stock Issuances The following transactions are for Weber Corporation in 2008:a. On March 1, the corporation was organized and received authorization to issue 5,000 shares of 8%, $100 par value
Treasury Stock The Stockholders’ Equity category of Bradford Company’s balance sheet on January 1, 2008, appeared as follows:The following transactions occurred during 2008:a. Reacquired 2,000
Treasury Stock Transactions The Stockholders’ Equity category of Little Joe’s balance sheet on January 1, 2008, appeared as follows:The following transactions occurred during 2008:a. Reacquired
Cash Dividends Kerry Company has 1,000 shares of $100 par value, 9% preferred stock and 10,000 shares of $10 par value common stock outstanding. The preferred stock is cumulative and
Cash Dividends The Stockholders’ Equity category of Jackson Company’s balance sheet as of January 1, 2008, appeared as follows:The notes that accompany the financial statements indicate that
Stock Dividends The Stockholders’ Equity category of Worthy Company’s balance sheet as of January 1, 2008, appeared as follows:The following transactions occurred during 2008:a. Declared a 10%

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