CMA / P2 / Sec. A / HW-3 / Class 8

1

CMA Part 2

Financial Decision Making

Financial Statement Analysis

Sec. A (Homework - 3)

Multiple Choice

1. North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit. Belle's quick ratio is

significantly better than the industry average. Which of the following factors should North consider as a

possible limitation of using this ratio when evaluating Belle's creditworthiness?

a. Fluctuating market prices of short-term investments may adversely affect the ratio.

b. Increasing market prices for Belle's inventory may adversely affect the ratio.

c. Belle may need to sell its available-for-sale investments to meet its current obligations

d. Belle may need to liquidate its inventory to meet its long-term obligations.

2. What effect would the sale of a company's trading securities at their carrying amounts for cash have on each

of the following ratios?

Current ratio Quick ratio

a. No effect No effect

b. Increase Increase

C. No effect Increase

d. Increase No effect

3. In analyzing a company's financial statement, which financial statements would a potential investor primarily

use to assess the company's liquidity and financial flexibility?

a. Balance sheet

b. Income statement

c. Statement of retained earnings

d. Statement of cash flows

4. Are the following ratios useful in assessing the liquidity position of a company?

Defensive

interval ratio

Return on

stockholders' equity

a. Yes Yes

b. Yes No

C. No Yes

d. No No

5. The following information pertains to Ali Corp. as of and for the current year ended December 31;

Liabilities

Stockholders' equity

Shares of common stock issued and outstanding

Net income

$60,000

500,000

10,000

30,000

During the year, Ali's officers exercised stock options for 1,000 shares of stock at an option price of $8 per

share. What was the effect of exercising the stock options?

a. Debt-to-equity ratio decreased to 12%

b. Earnings per share increased by $0.33

c. Asset turnover increased to 5.4%

d. No ratios were affected.

Item 6 and 7 are based on the following data:

Apex Corporation

SELECTED FINANCIAL DATA

Year Ended December 31, Current Year

Operating income $900,000

Interest expense (100,000)

Income before income tax 800,000

Income tax expense (320,000)

Net income 480,000

Preferred stock dividends (200,000)

Net income available to common stockholders $280,000

6. The times interest earned ratio is

a. 2.8 to 1

b. 4.8 to 1

c. 8.0 to 1

d. 9.0 to 1

7. The times preferred dividend earned ratio is

a. 1.4 to 1

b. 1.7 to 1

c. 2.4 to 1

d. 4.0 to 1

Items 8 and 9 are based on the following:

At December 31 of the current year, Curry Co. had the following balances in selected asset accounts:

Current

year

Increase over

previous year

Cash $300 $100

Accounts receivables, net 1,200 400

Inventory 500 200

Prepaid expenses 100 40

Other assets 400 150

Total assets $2,500 $890

Curry also had current liabilities of $1,000 at December 31 and net credit sales of $7,200 for the year.

8. What is Curry's acid-test ratio at December 31 of the current year?

a. 1.5

b. 1.6

c. 2.0

d. 2.1

9. What was the average number of days to collect Curry's accounts receivable during the year?

a. 30.4

b. 40.6

c. 50.7

d. 60.8

10. Which of the following ratios should be used in evaluating the effectiveness with which the company uses its

assets?

Receivables turnover Dividend payout ratio

a. Yes Yes

b. No No

C. Yes No

d. No Yes

11. The following computations were made from Clay Co.'s current year end books:

Number of days' sales in inventory 61

Number of days' sales in trade accounts receivable 33

What was the number of days in Clay's current year operating cycle?

a. 33

b. 47

c. 61

d. 94

12. The following financial ratios and calculations were based on information for Kohl Co.'s financial statements for

the current year:

Accounts receivable turnover

Ten times during the year

Total assets turnover

Two times during the year

Average receivables during the year

$200,000

What was Kohl's average total assets for the year?

a. $2,000,000

b. $1,000,000

c. $400,000

d. $200,000

Item 13 to 15 are based on the following:

Selected data pertaining to Lore Co. for the calendar year is as follows:

Net cash sales

Cost of goods sold

Inventory at the beginning of year

Purchases

Accounts receivables at beginning of year

Accounts receivables at end of year

$3,000

18,000

6,000

24,000

20,000

22,000

13. The accounts receivables turnover for the year was 5.0 times. What were Lore's net credit sales?

a. $105,000

b. $107,000

c. $110,000

d. $210,000

14. What was the inventory turnover for the year?

a. 1.2 times

b. 1.5 times

c. 2.0 times

d. 3.0 times

15. Lore would use which of the following to determine the average days' sales in inventory?

Numerator Denominator

a. 365 Average inventory

b. 365 Inventory turnover

C. Average inventory Sales dividend by 365

d. Sales divided by 365 Inventory turnover

16. Kline Co. had the following sales and accounts receivable balances at the end of the current year:

Cash sales

Net credit sales

Net accounts receivable, 1/1

Net accounts receivable, 12/31

$1,000,000

3,000,000

100,000

400,000

What is Kline's average collection period for its accounts receivables?

a. 48.0 days

b. 30.0 days

c. 22.5 days

d. 12.0 days

17. Frey Inc. was organized on January 2 of the current year with following capital structure

10% cumulative preferred stock, par value $100 and liquidation value

$105; authorized, issued and outstanding 1,000 shares

Common stock, par value $25; authorized 100,000 shares, issues and

outstanding 10,000 shares

$100,000

250,000

Frey's net income for the year ended December 31 was $450,000, but no dividends were declared. How much

was Frey's book value per preferred share at December 31?

a. $100

b. $105

c. $110

d. $115

18. The following data pertain to Cowl Inc. for the current year ended December 31:

Net sales

Net income

Total assets, January 1

Total assets, December 31

$600,000

150,000

2,000,000

3,000,000

What was Cowl's rate of return on assets?

a. 5%

b. 6%

c. 20%

d. 24%

19. Successful use of leverage is evidenced by a

a. Rate of return on investment greater than the rate of return on stockholders' equity

b. Rate of return on investment greater than the cost of debt

c. Rate of return on sales greater than the rate of return on stockholders' equity

d. Rate of return on sales greater than the cost of debt

20. How are dividend per share for common stock used in the calculation of the following?

Dividend per share

payout ratio

Earnings

per share

a. Numerator Numerator

b. Numerator Not used

C. Denominator Not used

d. Denominator Denominator