Chapter 161

Chapter 16 How Well Am I Doing?
--Financial Statement Analysis

True/False Questions
1. Common-size statements are financial statements of companies of similar size.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
2. One limitation of vertical analysis is that it cannot be used to compare two companies
that are significantly different in size.
3. The gross margin percentage is computed by dividing the gross margin by total assets.
AICPA FN: Reporting LO: 1 Level: Medium
4. The sale of used equipment at book value for cash will increase earnings per share.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2
AICPA BB: Critical Thinking

Level: Medium
5. Earnings per share is computed by dividing net income (after deducting preferred
dividends) by the average number of common shares outstanding.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings
ratio.
Ans: True AACSB: Analytic

Level: Hard
7. An increase in the number of shares of common stock outstanding will decrease a

company's price-earnings ratio if the market price per share remains unchanged.

Level: Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
16-5
Chapter 16 How Well Am I Doing?--Financial Statement Analysis

8. A company's financial leverage is negative when its return on total assets is less than
its return on common stockholders' equity.

Level: Hard
9. When computing return on common stockholders' equity, retained earnings should be

included as part of common stockholders' equity.
AICPA FN: Reporting LO: 2 Level: Hard
10. When a retailing company purchases inventory, the book value per share of the
company increases.

Level: Medium
11. If a company's acid-test ratio increases, its current ratio will also increase.
Ans: True AACSB: Analytic

Level: Medium
12. Assuming a current ratio greater than 1, acquiring land by issuing more of the
company's common stock will increase the current ratio.

Level: Medium
13. If a company successfully implements lean production, its inventory turnover ratio
should decrease.

Level: Medium
14. Short-term borrowing is not a source of working capital.

16-6

15. Working capital is computed by subtracting long-term liabilities from long-term
assets.
Multiple Choice Questions
16. Common size financial statements help an analyst to:
A) Evaluate financial statements of companies within a given industry of the
approximate same size.
B) Determine which companies in a similar industry are at approximately the same
stage of development.
C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over a period of time or between companies within a given industry
without respect to size.
D) Ascertain the relative potential of companies of similar size in different
industries.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted
17. Which of the following ratios would be least useful in determining a company's ability
to pay its expenses and liabilities?
A) current ratio
B) acid-test ratio
C) price-earnings ratio
D) times interest earned ratio
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3,4 Level: Medium
18. Most stockholders would ordinarily be least concerned with which of the following
ratios:
A) earnings per share.
B) dividend yield ratio.
C) price-earnings ratio.
D) acid-test ratio.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Easy
16-7

19. What effect will the issuance of common stock for cash at year-end have on the
following ratios?
Return on Total Assets Debt-to-Equity Ratio
A)
Increase
Increase
B)
Increase
Decrease
C)
Decrease
Increase
D)
Decrease
Decrease
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,4 Level: Medium
20. The market price of Friden Company's common stock increased from $15 to $18.
Earnings per share of common stock remained unchanged. The company's priceearnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
21. If a company is profitable and is effectively using leverage, which
one of the following ratios is likely to be the largest?
A) Return on total assets.
B) Return on total liabilities.
C) Return on common stockholders' equity.
D) Cannot be determined.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
22. Clark Company issued bonds with an interest rate of 10%. The company's return on
assets is 12%. The company's return on common stockholders' equity would most
likely:
A) increase.
B) decrease.
D) cannot be determined.
16-8

23. Which of the following transactions could generate positive financial leverage for a
corporation?
A) acquiring assets through the issuance of long-term debt.
B) acquiring assets through the use of accounts payable.
C) acquiring assets through the issuance of common stock.
D) both A and B above
24. Book value per common share is the amount of stockholders' equity per outstanding
share of common stock. Which one of the following statements about book value per
common share is most correct?
A) Market price per common share usually approximates book value per common
share.
B) Book value per common share is based on past transactions whereas the market
price of a share of stock mainly reflects what investors expect to happen in the
future.
C) A market price per common share that is greater than book value per common
share is an indication of an overvalued stock.
D) Book value per common share is the amount that would be paid to stockholders
if the company were sold to another company.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy Source: CMA, adapted
25. The ratio of total cash, marketable securities, accounts receivable, and short-term
notes to current liabilities is:
A) the debt-to-equity ratio.
B) the current ratio.
C) the acid-test ratio.
D) working capital.
AICPA FN: Reporting LO: 3,4 Level: Easy
16-9

26. A company has just converted a long-term note receivable into a short-term note
receivable. The company's acid-test and current ratios are both greater than 1. This
transaction will:
A) increase the current ratio and decrease the acid-test ratio.
B) increase the current ratio and increase the acid-test ratio.
C) decrease the current ratio and increase the acid-test ratio.
D) decrease the current ratio and decrease the acid-test ratio.
27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will
increase Broca's current ratio?
A) the purchase of inventory for cash.
B) the collection of an account receivable.
C) the payment of an account payable.
D) none of the above.
28. Allen Company's average collection period for accounts receivable was 25 days in
year 1, but increased to 40 days in year 2. Which of the following would most likely
be the cause of this change:
A) a decrease in accounts receivable relative to sales in year 2.
B) an increase in credit sales in year 2 as compared to year 1.
C) a relaxation of credit policies in year 2.
D) a decrease in accounts receivable in year 2 as compared to year 1.
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory
turnover ratio would:
A) increase.
B) decrease.
D) impossible to determine.
16-10

30. Gottlob Corporation's most recent income statement appears below:
Sales (all on account).................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Interest expense..........................................
Net income before taxes.............................
Income taxes..............................................
Net income.................................................
$824,000
477,000
347,000
208,000
139,000
37,000
102,000
30,000
$ 72,000
The gross margin percentage is closest to:

A) 20.7%
B) 72.7%
C) 42.1%
D) 481.9%
Solution:
Gross margin percentage = Gross margin Sales = $347,000 $824,000 = 42.1%
31. Crandall Company's net income last year was $60,000. The company paid preferred
dividends of $10,000 and its average common stockholders' equity was $480,000. The
company's return on common stockholders' equity for the year was closest to:
A) 12.5%
B) 10.4%
C) 2.1%
D) 14.6%
Solution:
Return on common stockholders' equity = (Net income Preferred dividends)
Average common stockholders' equity
= ($60,000 $10,000) $480,000 = 10.4%
16-11

32. Ardor Company's net income last year was $500,000. The company has 150,000
shares of common stock and 30,000 shares of preferred stock outstanding. There was
no change in the number of common or preferred shares outstanding during the year.
The company declared and paid dividends last year of $1.00 per share on the common
stock and $0.70 per share on the preferred stock. The earnings per share of common
stock is closest to:
A) $3.33
B) $3.19
C) $2.33
D) $3.47
Solution:
Earnings per share = (Net Income Preferred Dividends)
Average number of common shares outstanding
= ($500,000 $21,000) [(150,000 shares + 150,000 shares) 2]
= $3.19 per share
33. The following information relates to Konbu Corporation for last year:
Price earnings ratio............
Dividend payout ratio........
Earnings per share..............
15
30%
$5
What is Konbu's dividend yield ratio for last year?

A) 1.5%
B) 2.0%
C) 4.5%
D) 10.0%
16-12

Solution:
Dividend yield ratio = Dividends per share* Market price per share **
= $0.06 $3 = 2.0%
* Dividends per share = Dividend payout ratio Earnings per share
= 30% $5 = $0.06 per share
** Market price per share = Price earnings ratio Earnings per share
= 15 $5 = $3 per share
34. Richmond Company has 100,000 shares of $10 par value common stock issued and
outstanding. Total stockholders' equity is $2,800,000 and net income for the year is
$800,000. During the year Richmond paid $3.00 per share in dividends on its common
stock. The market value of Richmond's common stock is $24. What is the priceearnings ratio?
A) 3.0
B) 3.5
C) 4.8
D) 8.0
AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Price-earnings ratio = Market price per share Earnings per share*
= $24 $8 = 3.0
* Earnings per share = (Net income - Preferred dividends) Average # of common
shares outstanding
= ($800,000 - $0) [(100,000 shares + 100,000 shares) 2] = $8 per share
35. Hurst Company has 20,000 shares of common stock outstanding. These shares were
originally issued at a price of $15 per share. The current book value is $25.00 per
share and the current market value is $30.00 per share. The dividends on common
stock for the year totaled $45,000. The dividend yield ratio is:
A) 9%
B) 7.5%
C) 15%
D) 10%
16-13

Solution:
Dividend yield ratio = Dividends per share Market price per share
= ($45,000 20,000) $30.00 = 7.5%
36. Bramble Company's net income last year was $65,000 and its interest expense was
$15,000. Total assets at the beginning of the year were $620,000 and total assets at the
end of the year were $650,000. The company's income tax rate was 40%. The
company's return on total assets for the year was closest to:
A) 11.7%
B) 10.2%
C) 12.6%
D) 11.2%
Solution:
Return on total assets = Adjusted net income* Average total assets**
= $74,000 $635,000 = 11.7%
*Adjusted net income = Net income + [Interest expense (1-Tax rate)]
= $65,000 + 15,000 (1 0.40) = $74,000
**Average total assets = ($620,000 + $650,000) 2 = $635,000
37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%,
its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn
$70,000 per year before interest and taxes on a new investment of $500,000, then it
will be better off by $25,000 per year.
A) The company's reasoning is correct.
B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.
C) The company's reasoning is not correct, since interest is not tax-deductible.
D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.
16-14

38. Bucatini Corporation is contemplating the expansion of operations. This expansion
will generate a 11% return on the funds invested. To finance this operation, Bucatini
can either issue 12% bonds, issue 12% preferred stock, or issue common stock.
Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax
rate is 30%. In which of the financing options above is positive financial leverage
being generated?
A) none of the options generate positive financial leverage
B) the bonds
C) the common stock
D) the preferred stock
39. Consolo Corporation's net income for the most recent year was $809,000. A total of
100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $2.05 per share
and dividends on preferred stock were $1.80 per share. The earnings per share of
common stock is closest to:
A) $2.44
B) $8.09
C) $4.49
D) $6.04
Solution:
Earnings per share = (Net Income - Preferred Dividends)
= [$809,000 (200,000 $1.80)] [(100,000 shares + 100,000 shares) 2] = $4.49
16-15

40. Bary Corporation's net income last year was $2,604,000. The dividend on common
stock was $2.50 per share and the dividend on preferred stock was $2.40 per share.
The market price of common stock at the end of the year was $73.50 per share.
Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred
stock were outstanding. The price-earnings ratio is closest to:
A) 9.33
B) 11.89
C) 13.66
D) 8.47
Solution:
= $73.50 $7.88 = 9.33
* Earnings per share = (Net income Preferred dividends) Average number of
common shares outstanding
= [$2,604,000 (100,000 $2.40)] [(300,000 shares + 300,000 shares) 2] = $7.88
41. Arntson Corporation's net income last year was $7,975,000. The dividend on common
stock were outstanding. The dividend payout ratio is closest to:
A) 1.06
B) 0.51
C) 0.56
D) 1.29
Solution:
Dividend payout ratio = Dividends per share Earnings per share*
= $8.20 $14.55 = 0.56
* Earnings per share = (Net income Preferred dividends) Average number of
common shares outstanding
= [$7,975,000 (200,000 $3.50)] [(500,000 shares + 500,000 shares) 2] =
$14.55
16-16

42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and
the dividend on preferred stock was $1.10 per share. The market price of common
stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:
A) 0.02
B) 0.21
C) 0.23
D) 0.91
Solution:
Dividend yield ratio = Dividends per share (see above) Market price per share
= $11.60 $54.80 = 0.21
43. Inglish Corporation's most recent income statement appears below:
Gross margin..............................................
Income taxes (30%)...................................
Net income.................................................
$610,000
350,000
260,000
110,000
150,000
30,000
120,000
36,000
$ 84,000
The beginning balance of total assets was $560,000 and the ending balance was
$580,000. The return on total assets is closest to:
A) 18.4%
B) 14.7%
C) 26.3%
D) 21.1%
16-17

Solution:
= $105,000 $570,000 = 18.4%
*Adjusted net income
= Net income + [Interest expense (1 Tax rate)]
= $84,000 + [$30,000 (1 0.30)] = $105,000
44. Excerpts from Bellis Corporation's most recent balance sheet appear below:
Preferred stock.................................................
Common stock.................................................
Additional paid-in capitalcommon stock.......
Retained earnings.............................................
Total stockholders equity................................
Year 2
Year 1
$ 100,000 $ 100,000
300,000
300,000
370,000
370,000
480,000
390,000
$1,250,000 $1,160,000
Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in
total and dividends on preferred stock were $23,000 in total. The return on common
stockholders' equity for Year 2 is closest to:
A) 9.4%
B) 13.3%
C) 12.4%
D) 14.5%
Solution:
Average common stockholders' equity*
= ($160,000 $23,000) $1,105,000 = 12.4%
*Average common stockholders' equity = ($1,060,000 + $1,150,000) 2 = $1,105,000
16-18

45. Data from Baca Corporation's most recent balance sheet appear below:
Preferred stock.................................................
Common stock.................................................
$ 100,000
400,000
360,000
580,000
$1,440,000
A total of 400,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A) $3.35
B) $5.00
C) $1.90
D) $3.60
Solution:
Book value per share= Common stockholders' equity Number of common shares
outstanding* = $1,340,000 400,000 shares = $3.35 per share
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000.
The company's current ratio is closest to:
A) 0.88
B) 0.12
C) 9.40
D) 1.12
Solution:
Current ratio = Current assets Current liabilities = ($84,000 + $10,000) $84,000 =
1.12
16-19

47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in
accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts receivable,
and inventory. The company's acid-test ratio is closest to:
A) 1.57
B) 0.90
C) 1.33
D) 2.23
Solution:
Acid-test ratio = Quick assets* Current liabilities = $47,000 $30,000 = 1.57
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $13,000 + $7,000 + $27,000 = $47,000
48. Frame Company had $160,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was
$16,000. The company's accounts receivable turnover was closest to:
A) 12.31
B) 6.15
C) 16.00
D) 10.00
Solution:
Accounts receivable turnover = Sales on account Average accounts receivable* =
$160,000 $13,000 = 12.31
*Average accounts receivable = ($10,000 + $16,000) 2 = $13,000
16-20

49. Graber Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $18,000 and the ending accounts receivable balance was
$12,000. The company's average collection period was closest to:
A) 33.69 days
B) 42.12 days
C) 84.23 days
D) 50.54 days
Solution:
Average collection period = 365 days Accounts receivable turnover*
= 365 days 8.6667 = 42.12 days
* Accounts receivable turnover = Sales on account Average accounts receivable
balance
= $130,000 [($18,000 + $12,000) 2] = 8.6667
50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The
beginning inventory balance was $20,000 and the ending inventory balance was
$26,000. The company's inventory turnover was closest to:
A) 5.65
B) 10.00
C) 13.00
D) 11.30
Solution:
Inventory turnover = Cost of goods sold Average inventory*
= $260,000 $23,000 = 11.30
*Average inventory = ($20,000 + $26,000) 2 = $23,000
16-21

51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
inventory balance was $26,000 and the ending inventory balance was $24,000. The
company's average sale period was closest to:
A) 114.06 days
B) 54.75 days
C) 59.31 days
D) 57.03 days
Solution:
Average sale period = 365 days Inventory turnover*
= 365 days 6.4 = 57.03 days
* Inventory turnover = Cost of goods sold Average inventory
= $160,000 [($26,000 + $24,000) 2] = 6.4
52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are
$660,000, its total current liabilities are $220,000, its long-term liabilities are
$410,000, and its stockholders' equity is $400,000. Working capital is:
A) $370,000
B) $150,000
C) $250,000
D) $400,000
Solution:
Working capital = Current assets Current liabilities = $370,000 $220,000
= $150,000
16-22

53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are
$290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A)
0.62
A) 0.59
B) 1.70
C) 0.79
Solution:
Current ratio = Current assets Current liabilities = $390,000 $230,000 = 1.70
54. Data from Hollingworth Corporation's most recent balance sheet appear below:
Cash....................................
Marketable securities.........
Accounts receivable...........
Inventory............................
Prepaid expenses................
Current liabilities...............
$12,000
$29,000
$37,000
$51,000
$20,000
$115,000
The company's acid-test ratio is closest to:

A) 0.85
B) 0.10
C) 0.68
D) 0.36
Solution:
* Quick assets = Cash + Marketable securities + Accounts receivable
= $12,000 + $29,000 + $37,000 = $78,000
16-23

55. Eachus Corporation has provided the following data:
Inventory............................
Sales on account.................
Cost of goods sold..............
This Year Last Year

$135,000 $119,000
$136,000 $155,000
$698,000
$429,000
The accounts receivable turnover for this year is closest to:

A) 0.88
B) 5.50
C) 5.17
D) 1.13
Solution:
$698,000 $127,000 = 5.50
56. Data from Millier Corporation's most recent balance sheet and income statement
appear below:
Inventory............................
This Year Last Year

$101,000 $125,000
$183,000 $190,000
$758,000
$457,000
The average collection period for this year is closest to:

A) 48.7 days
B) 70.6 days
C) 85.6 days
D) 54.4 days
16-24

Solution:
$758,000 $113,000 = 6.71
= 365 6.71 = 54.4 days
*See above
57. Laware Corporation has provided the following data:
Inventory............................
This Year Last Year

$118,000 $138,000
$180,000 $170,000
$714,000
$447,000
The inventory turnover for this year is closest to:

A) 2.55
B) 0.94
C) 2.48
D) 1.06
Solution:
Inventory turnover = Cost of goods sold Average inventory* = $447,000 $175,000
= 2.55
16-25

58. Data from Buker Corporation's most recent balance sheet and income statement
appear below:
Inventory............................
This Year
$101,000
$155,000
$662,000
$399,000
Last Year
$125,000
$153,000
The average sale period for this year is closest to:

A) 142.0 days
B) 3.6 days
C) 140.9 days
D) 3.7 days
Solution:
Inventory turnover = Cost of goods sold Average inventory* = $399,000 $154,000
= 2.59
Average sale period = 365 days Inventory turnover* = 365 2.59
= 140.9 days
*See above
59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to:
A) 10.20
B) 14.50
C) 15.50
D) 18.80
Solution:
Times interest earned = Net operating income Interest expense
= ($290,000 + $66,000 + $20,000) $20,000 = 18.80
16-26

60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for
the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax
net income must be:
A) $60,000
B) $42,000
C) $31,500
D) $16,500
Solution:
Times interest earned = Earnings before interest expense and income taxes Interest
expense
4.0 = (Before-tax income + $15,000) $15,000
$60,000 = Earnings before income taxes + $15,000
Earnings before income taxes = $45,000
After-tax net income = Earnings before income taxes (1 Tax rate)
= $45,000 (1 0.30) = $31,500
61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The
company's debt-to-equity ratio is closest to:
A) 0.28
B) 0.72
C) 0.42
D) 2.60
Solution:
Debt-to-equity ratio = Liabilities Stockholders' equity
= $130,000 ($180,000 - $130,000) = 2.60
16-27

62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and
long term liabilities total $200,000. Brewster Company's total assets must be:
A) $375,000
B) $450,000
C) $550,000
D) $675,000
Solution:
= ($100,000 + $200,000) Stockholders' equity = 0.8
Stockholders' equity = $300,000 0.8 = $375,000
Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000
= $675,000
63. Boyington Corporation has provided the following data from its most recent income
statement:
Net operating income.........
Interest expense..................
Net income before taxes.....
Income taxes......................
Net income.........................
$87,000
$49,000
$38,000
$11,000
$27,000
The times interest earned ratio is closest to:

A) 0.55
B) 0.78
C) 2.54
D) 1.78
Solution:
= $87,000 $49,000 = 1.78
16-28

64. Wohlfarth Corporation has provided the following data from its most recent balance
sheet:
Total assets.....................................
Total liabilities................................
Total stockholders equity..............
$760,000
$570,000
$190,000
The debt-to-equity ratio is closest to:

A) 4.00
B) 3.00
C) 0.75
D) 0.33
Solution:
Debt-to-equity ratio = Liabilities Stockholders' equity = $570,000 $190,000
= 3.00
16-29

Use the following to answer questions 65-81:
Gschwend Corporation's most recent balance sheet and income statement appear below:
Statement of Financial Position
December 31, Year 2 and Year 1
(in thousands of dollars)
Assets
Current assets:
Cash....................................................................
Accounts receivable............................................
Inventory.............................................................
Prepaid expenses.................................................
Total current assets.................................................
Plant and equipment, net........................................
Total assets.............................................................
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable................................................
Accrued liabilities...............................................
Notes payable, short term...................................
Total current liabilities...........................................
Bonds payable........................................................
Total liabilities........................................................
Stockholders equity:
Preferred stock, $100 par value, 5%...................
Common stock, $1 par value..............................
Additional paid-in capitalcommon stock..........
Retained earnings................................................
Total stockholders equity......................................
Total liabilities & stockholders equity..................
16-30
Year 2
Year 1
$ 140 $ 130
160
140
170
150
90
90
560
510
840
900
$1,400 $1,410
$ 150 $ 150
60
60
60
60
270
270
230
270
500
540
200
200
100
100
100
100
500
470
900
870
$1,400 $1,410

Income Statement
For the Year Ended December 31, Year 2
Sales (all on account).............................................
Cost of goods sold..................................................
Gross margin..........................................................
Selling and administrative expense........................
Net operating income.............................................
Interest expense......................................................
Net income before taxes.........................................
Income taxes (30%)...............................................
Net income.............................................................
$1,370
800
570
439
131
31
100
30
$ 70
Dividends on common stock during Year 2 totaled $30 thousand. Dividends on preferred
stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $4.86
per share.
65. The gross margin percentage for Year 2 is closest to:
A) 814.3%
B) 71.3%
C) 41.6%
D) 12.3%
Solution:
Gross margin percentage = Gross margin Sales = $570 $1,370 = 41.6%
66. The earnings per share of common stock for Year 2 is closest to:
A) $0.60
B) $0.70
C) $1.00
D) $1.31
16-31

Solution:
Average number of common shares outstanding* = ($70 $10) 100 = $0.60
*Number of common shares outstanding = Common stock Par value
= $100 $1 = 100
67. The price-earnings ratio for Year 2 is closest to:
A) 8.10
B) 3.71
C) 6.94
D) 4.86
Solution:
= $100 $1 = 100
Price-earnings ratio = Market price per share Earnings per share
= $4.86 $0.60 = 8.10
68. The dividend payout ratio for Year 2 is closest to:
A) 66.7%
B) 50.0%
C) 833.3%
D) 42.9%
16-32

Solution:
= $100 $1 = 100
Dividend payout ratio = Dividends per share* Earnings per share
= $0.30 $0.60 = 50.0%
*Dividends per share = Common dividends Common shares
= $30 100 shares = $0.30 per share
69. The dividend yield ratio for Year 2 is closest to:
A) 75.00%
B) 8.23%
C) 2.06%
D) 6.17%
Solution:
= $100 $1 = 100
= $0.30 $0.60 = 50.0%
Dividend yield ratio = Dividends per share Market price per share = $0.30 $4.86 =
6.17%
16-33

70. The return on total assets for Year 2 is closest to:
A) 5.00%
B) 6.55%
C) 6.53%
D) 4.98%
Solution:
= $91.70 $1,405 = 6.53%
= $70 + [$31 (1 0.30)] = $91.70
71. The return on common stockholders' equity for Year 2 is closest to:
A) 6.78%
B) 7.91%
C) 8.76%
D) 10.22%
Solution:
Return on common stockholders' equity
= (Net income - Preferred dividends) Average common stockholders' equity*
= ($70 $10) $685 = 8.76%
*Average common stockholders' equity
= [($870 - $200) + ($900 $200)] 2 = $685
16-34

72. The book value per share at the end of Year 2 is closest to:
A) $0.60
B) $7.00
C) $9.00
D) $14.00
Solution:
Book value per share = Common stockholders' equity
Number of common shares outstanding* = $700 100 shares = $7.00 per share
= $100 $1 per share = 100 shares
73. The working capital at the end of Year 2 is:
A) $840 thousand
B) $560 thousand
C) $290 thousand
D) $900 thousand
Solution:
Working capital = Current assets - Current liabilities = $560 thousand $270 thousand
= $290 thousand
74. The current ratio at the end of Year 2 is closest to:
A) 0.36
B) 0.40
C) 0.89
D) 2.07
Solution:
Current ratio = Current assets Current liabilities = $560 $270 = 2.07
16-35

75. The acid-test ratio at the end of Year 2 is closest to:
A) 1.11
B) 1.12
C) 2.07
D) 1.44
Solution:
Acid-test ratio = Quick assets* Current liabilities = $300 $270 = 1.11
notes receivable = $140 + $0 + $160 = $300
76. The accounts receivable turnover for Year 2 is closest to:
A) 1.14
B) 8.56
C) 0.88
D) 9.13
Solution:
$1,370 $150 = 9.13
*Average accounts receivable = ($140 + $160) 2 = $150
77. The average collection period for Year 2 is closest to:
A) 1.1 days
B) 42.6 days
C) 0.9 days
D) 40.0 days
16-36

Solution:
$1,370 $150 = 9.13
Average collection period = 365 days Accounts receivable turnover
= 365 days 9.13 = 40.0 days
78. The inventory turnover for Year 2 is closest to:
A) 4.71
B) 0.88
C) 5.00
D) 1.13
Solution:
Inventory turnover = Cost of goods sold Average inventory* = $800 $160 = 5.00
*Average inventory = ($150 + $170) 2 = $160
79. The average sale period for Year 2 is closest to:
A) 45.3 days
B) 77.5 days
C) 213.1 days
D) 73.0 days
Solution:
Average sale period = 365 days Inventory turnover (see above)
= 365 days 5.00 = 73.0 days
16-37

80. The times interest earned for Year 2 is closest to:
A) 4.23
B) 6.04
C) 2.26
D) 3.23
Solution:
= $131 $31 = 4.23
81. The debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.71
B) 0.26
C) 0.56
D) 0.32
Solution:
= $500 $900 = 0.56
16-38

Orgeron Corporation's most recent balance sheet and income statement appear below:
Assets
Current assets:
Cash..............................................................
Accounts receivable......................................
Inventory.......................................................
Prepaid expenses...........................................
Total current assets...........................................
Plant and equipment, net..................................
Total assets.......................................................
Accounts payable..........................................
Accrued liabilities.........................................
Notes payable, short term.............................
Total current liabilities.....................................
Bonds payable..................................................
Total liabilities..................................................
Preferred stock, $100 par value, 5%................
Common stock, $2 par value........................
Additional paid-in capitalcommon stock....
Retained earnings..........................................
Total liabilities & stockholders equity............
Year 2
Year 1
$ 260 $ 120
160
190
180
160
60
70
660
540
680
750
$1,340 $1,290
$ 170 $ 150
40
40
80
90
290
280
290
300
580
580
100
100
200
200
100
100
360
310
760
710
$1,340 $1,290
16-39

Income Statement
Sales (all on account)....................................... $1,260
Cost of goods sold............................................
800
Gross margin....................................................
460
Selling and administrative expense..................
272
Net operating income.......................................
188
Interest expense................................................
38
Net income before taxes...................................
150
Income taxes (30%).........................................
45
Net income....................................................... $ 105
per share.
82. The gross margin percentage for Year 2 is closest to:
A) 57.5%
B) 22.8%
C) 438.1%
D) 36.5%
Solution:
Gross margin percentage = Gross margin Sales = $460 $1,260 = 36.5%
A) $1.05
B) $1.88
C) $1.50
D) $1.00
16-40

Solution:
Average number of common shares outstanding*
= ($105 $5) (100 shares + 100 shares)/2 = $1.00 per share
A) 11.30
B) 10.76
C) 7.53
D) 6.01
Solution:
= ($105 - $5) (100 shares + 100 shares)/2 = $1.00 per share
= $11.30 $1.00 = 11.30
16-41

A) 47.6%
B) 55.0%
C) 50.0%
D) 500.0%
Solution:
= $0.50 $1.00 = 50.0%
A) 4.42%
B) 0.45%
C) 90.91%
D) 4.87%
Solution:
= $0.50 $1.00 = 50.0%
Dividend yield ratio = Dividends per share Market price per share = $0.50 $11.30
= 4.42%
16-42

A) 10.01%
B) 7.98%
C) 7.84%
D) 9.82%
Solution:
= $131.60 $1,315 = 10.01%
= $105 + [$38 (1 0.30)] = $131.60
A) 15.75%
B) 16.54%
C) 13.61%
D) 14.29%
Solution:
Return on common stockholders' equity
= (Net income Preferred dividends) Average common stockholders' equity*
= ($105 $5) $635 = 15.75%
*Average common stockholders' equity = ($610 + $660) 2 = $635
16-43

A) $1.00
B) $7.60
C) $13.40
D) $6.60
Solution:
Number of common shares outstanding* = $660 100 shares = $6.60 per share
Payne Company's sales and current assets have been reported as follows over the last four
years:
Sales...................................
Year 4
Year 3
Year 2
Year 1
$810,000 $720,000 $630,000 $600,000
Cash....................................
Inventory............................
Total current assets.............
$ 36,000 $ 30,000 $ 25,000 $ 20,000

74,000
60,000
59,200
50,000
77,800
72,000
90,000
80,000
46,200
38,000
10,800
30,000
$234,000 $200,000 $185,000 $180,000
16-44

90. Suppose that Payne Company employs trend percentages to analyze performance with
Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be
closest to:
A) 128.6%
B) 74.1%
C) 112.5%
D) 135.0%
Solution:
Sales as trend percentage = Year 4 sales Year 1 sales
= ($810,000 $600,000) = 135.0%
91. Suppose that Payne Company employs trend percentages to analyze performance with
Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be
closest to:
A) 125%
B) 80%
C) 90%
D) 36%
Solution:
Inventory as trend percentage = Year 3 inventory Year 2 inventory
= $72,000 $90,000 = 80%
16-45

92. Suppose that Payne Company employs common size statements to analyze changes in
the current assets. The increase in the Accounts Receivable account when comparing
Year 3 to Year 2 would be closest to:
A) 1.3% increase
B) 0.4% increase
C) 5.3% increase
D) 4.2% increase
Solution:
Increase in Accounts Receivable account = ($60,000 $59,200) $59,200
= 1.3%
16-46

Financial statements for Orahood Company appear below:
Orahood Company
(dollars in thousands)
Year 2
Current assets:
Cash and marketable securities........................
Accounts receivable, net..................................
Inventory..........................................................
Prepaid expenses..............................................
Total current assets..............................................
Noncurrent assets:
Plant & equipment, net....................................
Total assets..........................................................
Accounts payable.............................................
Accrued liabilities............................................
Notes payable, short term................................
Total current liabilities........................................
Noncurrent liabilities:
Bonds payable..................................................
Total liabilities.................................................
Preferred stock, $10 par, 10%..........................
Common stock, $5 par.....................................
Total stockholders equity...................................
Total liabilities & stockholders equity...............
Year 1
$ 200 $ 170
170
140
120
120
20
30
510
460
1,530 1,540
$2,040 $2,000
$ 170 $ 160
60
50
270
290
500
500
290
790
300
800
100
100
200
200
280
280
670
620
1,250 1,200
$2,040 $2,000
16-47

Orahood Company
Income Statement
Sales (all on account)..........................................
Cost of goods sold...............................................
Gross margin.......................................................
Selling and administrative expense.....................
Net operating income..........................................
Interest expense...................................................
Net income before taxes......................................
Income taxes (30%)............................................
Net income..........................................................
$1,740
1,210
530
210
320
30
290
87
$ 203
Dividends during Year 2 totaled $153 thousand, of which $10 thousand were preferred
dividends. The market price of a share of common stock on December 31, Year 2 was $80.
93. Orahood Company's earnings per share of common stock for Year 2 was closest to:
A) $7.25
B) $2.14
C) $4.83
D) $5.08
Solution:
16-48

94. Orahood Company's dividend yield ratio on December 31, Year 2 was closest to:
A) 4.2%
B) 4.5%
C) 2.1%
D) 4.8%
Solution:
Dividends per share = Common dividends Common shares
Dividend yield ratio = Dividends per share Market price per share = $3.58 $80 =
4.5%
95. Orahood Company's return on total assets for Year 2 was closest to:
A) 11.1%
B) 10.0%
C) 9.0%
D) 10.5%
Solution:
= $224 $2,020 = 11.1%
= $203 + [$30 (1 0.30)] = $224
16-49

96. Orahood Company's current ratio at the end of Year 2 was closest to:
A) 0.63
B) 1.02
C) 0.55
D) 1.25
Solution:
97. Orahood Company's accounts receivable turnover for Year 2 was closest to:
A) 14.5
B) 10.1
C) 11.2
D) 7.8
Solution:
$1,740 $155 = 11.2
98. Orahood Company's average sale period for Year 2 was closest to:
A) 25.2 days
B) 46.8 days
C) 32.5 days
D) 36.2 days
Solution:
= 365 days 10.08 = 36.2 days
*Inventory turnover = Cost of goods sold Average inventory = $1,210 ($120 +
$120)/2 = 10.08
16-50

99. Orahood Company's times interest earned for Year 2 was closest to:
A) 9.7
B) 17.7
C) 6.8
D) 10.7
Solution:
= $320 $30 = 10.07
16-51

Financial statements for Matti Company appear below:
Matti Company
Balance Sheet
As of December 31
Current assets.........................................................
Long term investments...........................................
Plant, property, and equipment (net)......................
Total assets.............................................................
Year 2
Year 1
$ 90,000 $ 70,000
110,000 110,000
500,000 420,000
$700,000 $600,000
Current liabilities...................................................
Bonds payable........................................................
Preferred stock (par value $100, 8%)....................
Common stock (par value $5)................................
Additional paid-in capitalcommon stock.............
Retained earnings...................................................
Total liabilities and equities...................................
$110,000 $80,000
140,000 100,000
75,000
75,000
125,000 125,000
220,000 220,000
30,000
0
$700,000 $600,000
Matti Company
Income Statement
Sales.......................................................................
Gross margin..........................................................
Income taxes (30%)...............................................
Net Income.............................................................
$800,000
450,000
350,000
250,000
100,000
10,000
90,000
27,000
$ 63,000
Dividends were $33,000 for the year, of which $6,000 were for preferred stock.
16-52

100. The return on common stockholders' equity for Matti Company for Year 2 is closest
to:
A) 15.8%
B) 17.5%
C) 14.0%
D) 15.2%
Solution:
Average common stockholders' equity* = ($63,000 - $6,000) $360,000 = 15.8%
*Average common stockholders' equity = ($375,000 + $345,000) 2 = $360,000
101. The return on total assets for Matti Company for Year 2 is closest to:
A) 10.8%
B) 10.0%
C) 9.0%
D) 10.2%
Solution:
= $70,000 $650,000 = 10.8%
*Adjusted net income = Net income + [Interest expense (1 Tax rate)]
= $63,000 + [$10,000 (1 0.30)] = $70,000
16-53

102. The times interest earned for Matti Company for Year 2 is closest to:
A) 6.3
B) 7.3
C) 9.0
D) 10.0
Solution:
= $100,000 $10,000 = 10.00
103. The book value per share for Matti Company as of December 31, Year 2 is closest to:
A) $18.00
B) $13.80
C) $28.00
D) $15.00
Solution:
Number of common shares outstanding* = $375,000 25,000 = $15.00
= $125,000 $5 = 25,000
16-54

Financial statements for Lardy Company appear below:
Lardy Company
Year 2 Year 1
Current assets:
Cash and marketable securities........................... $ 180 $ 180
Accounts receivable, net.....................................
220
190
Inventory.............................................................
170
180
30
20
600
570
Noncurrent assets:
Plant & equipment, net....................................... 1,830 1,820
Total assets............................................................. $2,430 $2,390
Accounts payable................................................ $ 120 $ 130
90
60
140
160
350
350
Bonds payable.....................................................
360
400
Total liabilities....................................................
710
750
Stockholders equity:..............................................
Preferred stock, $20 par, 10%.............................
120
120
Common stock, $10 par......................................
140
140
160
160
Retained earnings................................................ 1,300 1,220
Total stockholders equity...................................... 1,720 1,640
Total liabilities & stockholders equity.................. $2,430 $2,390
16-55

Lardy Company
Income Statement
Sales (all on account)............................................. $2,060
Cost of goods sold.................................................. 1,440
Gross margin..........................................................
620
240
380
40
340
Income taxes (30%)...............................................
102
Net income............................................................. $ 238
dividends. The market price of a share of common stock on December 31, Year 2 was $210.
104. Lardy Company's earnings per share of common stock for Year 2 was closest to:
A) $16.14
B) $24.29
C) $17.00
D) $3.65
Solution:
= ($238 $12) 14 = $16.14
= $140 $10 =14
16-56

105. Lardy Company's price-earnings ratio on December 31, Year 2 was closest to:
A) 8.65
B) 13.01
C) 57.61
D) 12.35
Solution:
= ($238 $12) 14 = $16.14
= $140 $10 =14
= $210 $16.14 = 13.01
106. Lardy Company's dividend payout ratio for Year 2 was closest to:
A) 38.4%
B) 23.5%
C) 66.4%
D) 64.6%
16-57

Solution:
= ($238 $12) 14 = $16.14
= $140 $10 =14
= $10.43 $16.14 = 64.6%
= $146 14 = $10.43
107. Lardy Company's dividend yield ratio on December 31, Year 2 was closest to:
A) 5.4%
B) 1.2%
C) 5.0%
D) 4.6%
Solution:
= ($238 $12) 14 = $16.14
= $140 $10 =14
= $10.43 $16.14 = 64.6%
= $146 14 = $10.43
= $10.43 $210 = 5.0%
16-58

108. Lardy Company's return on total assets for Year 2 was closest to:
A) 11.0%
B) 8.7%
C) 9.9%
D) 10.4%
Solution:
= $266 $2,410 = 11.0%
= $238 + 40 x (1 .30) = $266
109. Lardy Company's return on common stockholders' equity for Year 2 was closest to:
A) 14.5%
B) 15.3%
C) 13.5%
D) 14.2%
Solution:
Average common stockholders' equity* = ($238 $12) $1,560 = 14.5%
16-59

110. Lardy Company's book value per share at the end of Year 2 was closest to:
A) $21.43
B) $114.29
C) $10.00
D) $122.86
Solution:
Number of common shares outstanding* = $1,600 14 = $114.29
= $140 $10 = 14
Information concerning the common stock of Hopkins Company follows:
Market price per share on December 31.... $36.00
Book value per share on December 31...... $27.00
Earnings per share for the year.................. $4.50
Par value per share..................................... $10.00
Dividend per share for the year.................. $1.80
111. Hopkins Company's dividend payout ratio is:
A) 60%
B) 40%
C) 5%
D) 18%
Solution:
= $1.80 $4.50 = 40%
16-60

112. Hopkins Company's price-earnings ratio is:
A) 8.0
B) 6.67
C) 6.0
D) 20.0
Solution:
Price-earnings ratio = Market price per share Earnings per share= $36.00 $4.50 =
8.0
113. Hopkins Company's dividend yield ratio is:
A) 18%
B) 12.5%
C) 6%
D) 5%
Solution:
= $1.80 $36.00 = 5%
16-61

Erichsen Corporation's most recent balance sheet and income statement appear below:
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 120 $ 150
200
180
Inventory.............................................................
220
200
10
10
550
540
830
830
Total assets............................................................. $1,380 $1,370
30
30
50
50
190
180
Bonds payable........................................................
250
300
440
480
100
100
200
200
160
160
480
430
940
890
16-62

Income Statement
770
Gross margin..........................................................
520
294
226
33
193
Income taxes (30%)...............................................
58
Net income............................................................. $ 135
per share.
A) $0.68
B) $0.65
C) $1.13
D) $0.97
Solution:
= ($135 $5) 200 = $0.65
= $200 $1 = 200
16-63

A) 11.39
B) 16.25
C) 17.00
D) 9.78
Solution:
= ($135 $5) 200 = $0.65
= $200 $1 = 200
= $11.05 $0.65 = 17.00
A) 61.5%
B) 769.2%
C) 59.3%
D) 65.4%
Solution:
= ($135 $5) 200 = $0.65
= $200 $1 = 200
Dividend payout ratio = Dividends per share** Earnings per share
= $0.40 $0.65 = 61.5%
**Dividends per share = Common dividends Common shares
= $80 200 = $0.40
16-64

A) 94.12%
B) 3.85%
C) 3.62%
D) 0.23%
Solution:
= ($135 $5) 200 = $0.65
= $200 $1 = 200
Dividend payout ratio = Dividends per share** Earnings per share
= $0.40 $0.65 = 61.5%
**Dividends per share = Common dividends Common shares
= $80 200 = $0.40
= $0.40 $11.05 = 3.62%
A) 11.50%
B) 9.78%
C) 11.46%
D) 9.82%
16-65

Solution:
= $158.10 $1,375 = 11.50%
= $135 + 33 x (1 0.30) = $158.10
A) 14.75%
B) 14.21%
C) 16.56%
D) 15.95%
Solution:
Average common stockholders' equity* = ($135 $5) $815 = 15.95%
A) $4.70
B) $4.20
C) $0.65
D) $6.90
Solution:
Number of common shares outstanding* = $840 200 = $4.20
= $200 $1 = 200
16-66

Excerpts from Jameel Corporation's most recent balance sheet and income statement appear
below:
Total assets.............................................................
Year 2 Year 1
$1,540 $1,530
$470
$490
$ 100 $ 100
200
200
150
150
620
590
$1,070 $1,040
Sales (all on account)

Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income
$1,290
790
500
334
166
30
136
41
$ 95
per share.
16-67

A) $0.48
B) $0.68
C) $0.45
D) $0.83
Solution:
= ($95 $5) 200 = $0.45
= $200 $1 = 200
A) 5.69
B) 8.60
C) 4.66
D) 8.06
Solution:
= ($95 $5) 200 = $0.45
= $200 $1 = 200
Price-earnings ratio = Market price per share Earnings per share (see above)
= $3.87 $0.45 = 8.60
16-68

A) 1111.1%
B) 63.2%
C) 66.7%
D) 72.2%
Solution:
Number of common shares outstanding = Common stock Par value
= $200 $1 = 200
Dividend payout ratio = Dividends per share* Earnings per share (see above)
= $0.30 $0.45 = 66.7%
= $60 200 = $0.30
A) 92.31%
B) 7.75%
C) 0.65%
D) 8.40%
Solution:
Number of common shares outstanding = Common stock Par value
= $200 $1 = 200
= $60 200 = $0.30
Dividend yield ratio = Dividends per share* Market price per share
= $0.30 $3.87 = 7.75%
16-69

A) 6.17%
B) 7.53%
C) 6.19%
D) 7.56%
Solution:
= $116 $1,535 = 7.56%
= $95 + [$30 (1 0.30)] = $116
A) 9.42%
B) 8.53%
C) 9.00%
D) 9.95%
Solution:
16-70

A) $5.35
B) $4.85
C) $0.45
D) $7.70
Solution:
Number of common shares outstanding* = $970 200 = $4.85
= $200 $1 = 200
16-71

Financial statements for Spencer Company appear below:
Spencer Company
Balance Sheet
December 31
Cash........................................................................
Accounts receivable...............................................
Inventories..............................................................
Prepaid expenses....................................................
Plant and equipment (net)......................................
Total assets.............................................................
$ 200,000
240,000
340,000
20,000
400,000
$1,200,000
Accounts payable...................................................
Taxes payable.........................................................
Interest payable......................................................
Long-term bonds payable......................................
Common stock $(14 par).......................................
Total liabilities & stockholders equities................
$ 300,000
90,000
10,000
200,000
280,000
320,000
$1,200,000
Spencer Company
Income Statement
For the Year Ended December 31
Gross margin..........................................................
Selling and administrative expenses......................
Income taxes (30%)...............................................
Net income.............................................................
16-72
$1,800,000
1,120,000
680,000
520,000
160,000
20,000
140,000
42,000
$ 98,000

128. At December 31, Spencer Company's current ratio was closest to:
A) 1.10
B) 1.33
C) 2.00
D) 2.67
Solution:
Current ratio = Current assets Current liabilities
= ($1,200,000 $400,000) ($300,000 + $90,000 + $10,000) = 2.00
129. At December 31, Spencer Company's acid-test ratio was closest to:
A) 1.10
B) 0.50
C) 0.90
D) 1.15
Solution:
notes receivable = $200,000 + $240,000 = $440,000
130. Suppose that the Inventory account had a balance of $300,000 at the beginning of the
year. Spencer Company's inventory turnover for the year was closest to:
A) 3.50
B) 6.00
C) 5.63
D) 3.23
16-73

Solution:
Inventory turnover = Cost of goods sold Average inventory* = $1,120,000
$320,000 = 3.50
131. Suppose that the balance of Accounts Receivable remained unchanged between the
beginning and end of the year. Spencer Company's average collection period for the
year was closest to:
A) 27 days
B) 28 days
C) 49 days
D) 75 days
Solution:
$1,800,000 $240,000 = 7.5
= 365 7.5 = 49
132. Spencer Company's debt-to-equity ratio on December 31 was closest to:
A) 0.333
B) 0.500
C) 1.000
D) 0.375
Solution:
= ($300,000 + $90,000 + $10,000 + $200,000) ($280,000 + $320,000) = 1.000
16-74

Financial statements for Marbet Company appear below:
Marbet Company
Current assets:
Cash and marketable securities...........................
Inventory.............................................................
Noncurrent assets:
Plant & equipment, net.......................................
Total assets.............................................................
Bonds payable.....................................................
Total liabilities....................................................
Preferred stock, $10 par, 8%...............................
Common stock, $5 par........................................
Year 2
Year 1
$ 160
180
110
40
490
$ 160
160
130
40
490
1,910 1,870
$2,400 $2,360
$ 120 $ 150
80
50
200
200
400
400
500
900
500
900
120
120
200
200
280
280
900
860
1,500 1,460
$2,400 $2,360
16-75

Marbet Company
Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$1,600
1,120
480
190
290
50
240
72
$ 168
133. Marbet Company's working capital (in thousands of dollars) at the end of Year 2 was
closest to:
A) $90
B) $1,500
C) $490
D) $600
Solution:
Working capital = Current assets Current liabilities = $490 $400 = $90
134. Marbet Company's current ratio at the end of Year 2 was closest to:
A) 0.37
B) 1.20
C) 1.23
D) 0.44
Solution:
16-76

135. Marbet Company's acid-test ratio at the end of Year 2 was closest to:
A) 0.85
B) 2.27
C) 0.31
D) 0.44
Solution:
notes receivable = $160 + $180 = $340
136. Marbet Company's accounts receivable turnover for Year 2 was closest to:
A) 9.3
B) 13.3
C) 6.6
D) 9.4
Solution:
$1,600 $170 = 9.4
16-77

137. Marbet Company's average collection period for Year 2 was closest to:
A) 27.4 days
B) 39.1 days
C) 55.4 days
D) 38.8 days
Solution:
$1,600 $170 = 9.4
= 365 9.4 = 38.8 days
138. Marbet Company's inventory turnover for Year 2 was closest to:
A) 13.3
B) 6.6
C) 9.4
D) 9.3
Solution:
Inventory turnover = Cost of goods sold Average inventory* = $1,120 $120 = 9.3
16-78

139. Marbet Company's average sale period for Year 2 was closest to:
A) 38.8 days
B) 55.4 days
C) 39.1 days
D) 27.4 days
Solution:
Inventory turnover = Cost of goods sold Average inventory* = $1,120 $120 = 9.3
Average sale period = 365 days Inventory turnover = 365 9.3
= 39.1 days
Selected financial data for Drew Company appear below:
Drew Company
Selected Financial Data
As of December 31
Cash........................................................................
Accounts receivable (net)......................................
Inventory................................................................
Short-term marketable securities...........................
Land and building (net)..........................................
Mortgage payable-current portion.........................
Accounts payable and accrued liabilities...............
Short-term notes payable.......................................
Year 2
$75,000
$225,000
$270,000
$40,000
$500,000
$30,000
$120,000
$50,000
Year 1
$35,000
$200,000
$210,000
$20,000
$500,000
$25,000
$110,000
$70,000
Year Ended December 31

Sales (all on credit)................................................
Year 2
Year 1
$1,500,000 $1,300,000
$900,000
$800,000
16-79

140. Drew Company's acid-test ratio as of December 31, Year 2, was closest to:
A) 3.6
B) 3.1
C) 2.0
D) 1.7
Solution:
Acid-test ratio = Quick assets* Current liabilities
= $340,000 ($30,000 + $120,000 + $50,000) = 1.7
141. Drew Company's average sale period for Year 2 was closest to:
A) 97 days
B) 34 days
C) 58 days
D) 219 days
Solution:
= $900,000 $240,000 = 3.75
Average sale period = 365 days Inventory turnover
= 365 days 3.75 = 97 days
16-80

142. Drew Company's average collection period for Year 2 was closest to:
A) 86 days
B) 52 days
C) 55 days
D) 304 days
Solution:
$1,500,000 $212,500 = 7.06
Average collection period = 365 days Accounts receivable turnover = 365 days
7.06 = 52 days
16-81

Rosenfield Corporation's most recent balance sheet and income statement appear below:
Assets
Current assets:
Cash....................................................................
Inventory.............................................................
Total assets.............................................................
Bonds payable........................................................
16-82
Year 2
Year 1
10 $ 130
150
130
140
120
20
20
320
400
890
830
$1,210 $1,230
$ 160 $ 180
60
70
60
70
280
320
70
110
350
430
100
100
200
200
180
180
380
320
860
800
$1,210 $1,230

Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$1,280
870
410
215
195
16
179
54
$ 125

A) $320 thousand
B) $860 thousand
C) $890 thousand
D) $40 thousand
Solution:
Working capital = Current assets Current liabilities = $320 thousand $280
thousand = $40 thousand
A) 1.09
B) 1.14
C) 0.26
D) 0.29
Solution:
16-83

A) 0.91
B) 1.14
C) 0.57
D) 0.64
Solution:
A) 1.15
B) 8.53
C) 0.87
D) 9.14
Solution:
$1,280 $140 = 9.14
A) 1.2 days
B) 39.9 days
C) 0.9 days
D) 42.8 days
16-84

Solution:
$1,280 $140 = 9.14
= 365 days 9.14 = 39.9 days
A) 0.86
B) 6.21
C) 6.69
D) 1.17
Solution:
= $870 $130 = 6.69
A) 248.1 days
B) 54.6 days
C) 58.8 days
D) 39.9 days
Solution:
= $870 $130 = 6.69
= 365 days 6.69 = 54.6 days
16-85

Excerpts from Debnam Corporation's most recent balance sheet appear below:
Current assets:
Cash............................................
Accounts receivable....................
Inventory.....................................
Prepaid expenses.........................
Total current assets.........................
Total current liabilities...................
Year 2
Year 1
$150
130
160
90
$530
$200
$150
110
150
90
$500
$210
Sales on account in Year 2 amounted to $1,170 and the cost of goods sold was $700.
A) $330 thousand
B) $530 thousand
C) $1,030 thousand
D) $860 thousand
Solution:
A) 0.38
B) 0.26
C) 2.65
D) 0.68
Solution:
16-86

A) 1.40
B) 1.85
C) 1.47
D) 2.65
Solution:
A) 9.00
B) 0.85
C) 1.18
D) 9.75
Solution:
$1,170 $120 = 9.75
A) 0.8 days
B) 37.4 days
C) 1.2 days
D) 40.6 days
16-87

Solution:
$1,170 $120 = 9.75
= 365 days 9.75 = 37.4 days
A) 1.07
B) 0.94
C) 4.38
D) 4.52
Solution:
A) 80.8 days
B) 49.9 days
C) 83.3 days
D) 218.4 days
Solution:
= 365 days 4.52 = 80.8 days
16-88

Excerpts from Jordison Corporation's most recent balance sheet appear below:
Current assets:
Cash............................................
Inventory.....................................
Year 2
Year 1
$200
160
170
80
$610
$290
$160
150
150
80
$540
$270
A) $320 thousand
B) $840 thousand
C) $1,000 thousand
D) $610 thousand
Solution:
A) 2.10
B) 0.42
C) 0.31
D) 0.74
Solution:
16-89

A) 1.36
B) 2.10
C) 1.24
D) 1.52
Solution:
A) 1.07
B) 0.94
C) 8.00
D) 7.75
Solution:
$1,240 $155 = 8.00
A) 1.13
B) 4.56
C) 4.29
D) 0.88
Solution:
16-90

Data from Carrel Corporation's most recent balance sheet appear below:
Current assets:
Cash............................................
Inventory.....................................
Year 2
Year 1
$100
250
120
90
$560
$250
$160
300
110
80
$650
$270
A) $930 thousand
B) $310 thousand
C) $950 thousand
D) $560 thousand
Solution:
A) 0.38
B) 0.96
C) 2.24
D) 0.36
Solution:
16-91

A) 1.40
B) 2.24
C) 1.76
D) 1.04
Solution:
A) 69.7 days
B) 0.8 days
C) 1.2 days
D) 63.4 days
Solution:
= 365 days 5.24 = 69.7 days
*Accounts receivable turnover = Net credit sales Average accounts receivable
= $1,440 [($300 + $250) 2] = 5.24
16-92

A) 30.4 days
B) 47.2 days
C) 49.2 days
D) 225.6 days
Solution:
= 365 days 7.73 = 47.2 days
16-93

Financial statements for Narasaki Company appear below:
Narasaki Company
Year 2
Current assets:
Inventory.............................................................
Noncurrent assets:
Total assets.............................................................
Bonds payable.....................................................
Common stock, $2 par........................................
16-94
Year 1
$ 130 $ 120
200
170
130
130
90
80
550
500
1,380 1,360
$1,930 $1,860
$ 160 $ 160
90
80
110
110
360
350
510
870
500
850
100
100
160
160
240
240
560
510
1,060 1,010
$1,930 $1,860

Narasaki Company
Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$2,960
2,070
890
350
540
50
490
147
$ 343
167. Narasaki Company's times interest earned for Year 2 was closest to:
A) 17.8
B) 10.8
C) 9.8
D) 6.9
Solution:
= $540 $50 = 10.8
168. Narasaki Company's debt-to-equity ratio at the end of Year 2 was closest to:
A) 0.48
B) 0.34
C) 1.55
D) 0.82
Solution:
= $870 $1,060 = 0.82
16-95

Parmeter Corporation's most recent balance sheet and income statement appear below:
Year 2
Assets
Current assets:
Cash.................................................................
Accounts receivable.........................................
Inventory..........................................................
Prepaid expenses..............................................
Total current assets..............................................
Plant and equipment, net.....................................
Total assets..........................................................
Accounts payable.............................................
Accrued liabilities............................................
Notes payable, short term................................
Total current liabilities........................................
Bonds payable.....................................................
Total liabilities.....................................................
Stockholders equity:...........................................
Preferred stock, $100 par value, 5%................
Common stock, $2 par value...........................
Total stockholders equity...................................
Total liabilities & stockholders equity...............
16-96
Year 1
80 $ 140
120
110
130
110
100
90
430
450
670
730
$1,100 $1,180
$ 170 $ 190
40
50
80
90
290
330
70
120
360
450
100
100
200
200
120
120
320
310
740
730
$1,100 $1,180

Income Statement
Sales (all on account).......................................... $1,270
Cost of goods sold...............................................
790
Gross margin.......................................................
480
Selling and administrative expense.....................
369
Net operating income..........................................
111
Interest expense...................................................
18
Net income before taxes......................................
93
Income taxes (30%)............................................
28
Net income.......................................................... $ 65
A) 5.17
B) 8.81
C) 6.17
D) 3.61
Solution:
= $111 $18 = 6.17
A) 0.20
B) 0.56
C) 0.09
D) 0.49
Solution:
= $360 $740 = 0.49
16-97

Data from Pruette Corporation's most recent balance sheet and the company's income
statement appear below:
Year 2 Year 1
Total assets..................................... $1,260 $1,230
$580
$560
$680
$670
Income Statement
Sales (all on account)................................. $1,270
860
Gross margin..........................................................
410
280
130
Interest expense......................................................30
100
Income taxes (30%)...............................................30
Net income.............................................................
$ 70
A) 6.19
B) 3.33
C) 4.33
D) 2.33
Solution:
= $130 $30 = 4.33
16-98

A) 0.34
B) 0.85
C) 1.21
D) 0.43
Solution:
= $580 $680 = 0.85
16-99

Essay Questions
173. Espinola Corporation's most recent balance sheet and income statement appear below:
Year 2
Assets
Current assets:
Cash...................................................................
Accounts receivable..........................................
Inventory...........................................................
Prepaid expenses...............................................
Total current assets...............................................
Plant and equipment, net......................................
Total assets............................................................
Accounts payable..............................................
Accrued liabilities..............................................
Notes payable, short term..................................
Total current liabilities..........................................
Bonds payable......................................................
Total liabilities......................................................
Preferred stock, $100 par value, 5%..................
Common stock, $1 par value.............................
Additional paid-in capitalcommon stock........
Retained earnings..............................................
Total stockholders equity.....................................
Total liabilities & stockholders equity.................
16-100
Year 1
$ 320 $ 180
220
240
140
130
20
20
700
570
860
920
$1,560 $1,490
$ 200 $ 170
80
80
40
40
320
290
210
220
530
510
100
100
100
100
150
150
680
630
1,030
980
$1,560 $1,490

Income Statement
Sales (all on account)............................................ $1,220
Cost of goods sold................................................
790
Gross margin........................................................
430
Selling and administrative expense......................
268
Net operating income...........................................
162
Interest expense....................................................
26
Net income before taxes.......................................
136
Income taxes (30%)..............................................
41
Net income............................................................ $ 95
Dividends on common stock during Year 2 totaled $40 thousand. Dividends on
preferred stock totaled $5 thousand. The market price of common stock at the end of
Year 2 was $12.87 per share.
Required:
Compute the following for Year 2:
a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
16-101

Ans:
a. Gross margin percentage = Gross margin Sales = $430 $1,220 = 35.2%
b. Earnings per share = (Net Income Preferred Dividends)
*Number of common shares outstanding
= Common stock Par value = $100 $1 per share = 100 shares
c. Price-earnings ratio = Market price per share Earnings per share (see above)
= $12.87 $0.90 = 14.3
d. Dividend payout ratio = Dividends per share* Earnings per share (see
above)
= $0.40 $0.90 = 44.4%
*Dividends per share = Common dividends Common shares (see above)
e. Dividend yield ratio = Dividends per share (see above) Market price per
share
= $0.40 $12.87 = 3.11%
f. Return on total assets = Adjusted net income* Average total assets**
= $113.2 $1,525 = 7.42%
= Net income + [Interest expense (1Tax rate)]
= $95 + 26 (1-0.30) = $113.2
g. Return on common stockholders' equity = (Net income Preferred dividends)
= ($95 $5) $905 = 9.94%
h. Book value per share = Common stockholders' equity Number of common
shares outstanding* = $930 100 shares = $9.30 per share
i. Working capital = Current assets Current liabilities = $700 - $320 = $380
16-102

j. Current ratio = Current assets Current liabilities = $700 $320 = 2.19
k. Acid-test ratio = Quick assets* Current liabilities = $540 $320 = 1.69
*Quick assets = Cash + Marketable securities + Accounts receivable + Shortterm notes receivable = $320 + $0 + $220 = $540
l. Accounts receivable turnover = Sales on account Average accounts
receivable* = $1,220 $230 = 5.30
m. Average collection period = 365 days Accounts receivable turnover (see
above) = 365 days 5.30 = 68.9 days
n. Inventory turnover = Cost of goods sold Average inventory*
= $790 $135 = 5.85
o. Average sale period = 365 days Inventory turnover (see above)
= 365 days 5.85 = 62.4 days
p. Times interest earned = Net operating income Interest expense
= $162 $26 = 6.23
q. Debt-to-equity ratio = Liabilities Stockholders' equity
= $530 $1,030 = 0.51
AACSB: Analytic AICPA BB: Critical Thinking
LO: 1,2,3,4 Level: Medium
AICPA FN: Reporting
16-103

174. Slaubaugh Corporation's most recent balance sheet and income statement appear
below:
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 100 $ 140
160
180
Inventory.............................................................
210
190
40
50
510
560
860
820
Total assets............................................................. $1,370 $1,380
Bonds payable........................................................
Preferred stock, $100 par value, 10%.................
16-104
$ 160 $ 180
80
80
80
80
320
340
70
100
390
440
200
200
200
200
130
130
450
410
980
940
$1,370 $1,380

Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$1,350
820
530
399
131
17
114
34
$ 80

Required:
a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
Ans:
a. Gross margin percentage = Gross margin Sales = $530 $1,350 = 39.3%
b. Earnings per share = (Net Income - Preferred Dividends)
*Number of common shares outstanding = Common stock Par value = $200
$1 per share = 200 shares
c. Price-earnings ratio = Market price per share Earnings per share (see above)
= $2.88 $0.30 = 9.6
16-105

d. Dividend payout ratio = Dividends per share* Earnings per share (see
above)
= $0.10 $0.30 = 33.3%
e. Dividend yield ratio = Dividends per share (see above) Market price per
share
= $0.10 $2.88 = 3.47%
f. Return on total assets = Adjusted net income* Average total assets**
= $91.9 $1,375 = 6.68%
*Adjusted net income = Net income + [Interest expense (1Tax rate)]
= $80 + 17 (10.30) = $91.9
g. Return on common stockholders' equity = (Net income Preferred dividends)
= ($80 $20) $760 = 7.89%
h. Book value per share = Common stockholders' equity
Number of common shares outstanding*
LO: 1,2 Level: Medium
16-106
AICPA FN: Reporting

175. Philo Corporation's most recent income statement appears below:
Gross margin..............................................
Income taxes..............................................
Net income.................................................
$561,000
325,000
236,000
106,000
130,000
35,000
95,000
30,000
$ 65,000
Required:
Compute the gross margin percentage.
Ans:
Gross margin percentage = Gross margin Sales = $236,000 $561,000 = 42.1%
LO: 1 Level: Easy
AICPA FN: Reporting
16-107

176. Financial statements for Pratt Company appear below:
Pratt Company
Year 2
Current assets:
Inventory.............................................................
Noncurrent assets:
Total assets.............................................................
Bonds payable.....................................................
Common stock, $5 par........................................
16-108
Year 1
$ 140 $ 140
190
180
150
150
70
70
550
540
1,490 1,420
$2,040 $1,960
$ 160 $ 160
50
60
230
250
440
470
300
740
300
770
120
120
180
180
210
210
790
680
1,300 1,190
$2,040 $1,960

Pratt Company
Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$2,000
1,400
600
240
360
30
330
99
$ 231
dividends. The market price of a share of common stock on December 31, Year 2 was
$80.
Required:
a. Earnings per share of common stock.
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.
h. Working capital.
i. Current ratio.
j. Acid-test ratio.
k. Accounts receivable turnover.
l. Average collection period.
m. Inventory turnover.
n. Average sale period.
o. Times interest earned.
p. Debt-to-equity ratio.
16-109

Ans:
a. Earnings per share = (Net Income Preferred Dividends)
= ($231 $12) 36 = $6.08
= $180 $5 = 36
b. Price-earnings ratio = Market price per share Earnings per share (see above)
= $80 $6.08 = 13.2
c. Dividend payout ratio = Dividends per share* Earnings per share (see
above)
= $3.03 $6.08 = 49.8%
*Dividends per share = Common dividends Common shares**
= $109 36 = $3.03
**See above
d. Dividend yield ratio = Dividends per share* Market price per share
= $3.03 $80.00 = 3.78% *See above
e. Return on total assets = Adjusted net income* Average total assets**
= $252 $2,000 = 12.60%
= $231 + 30 (1 0.30) = $252
f. Return on common stockholders' equity = (Net income Preferred dividends)

g. Book value per share = Common stockholders' equity
Number of common shares outstanding* = $1,180 36 = $32.78
= $180 $5 = 36
16-110

h. Working capital = Current assets Current liabilities = $550 $440 = $110
i. Current ratio = Current assets Current liabilities = $550 $440 = 1.25
j. Acid-test ratio = Quick assets* Current liabilities = $330 $440 = 0.75
*Quick assets = Cash + Marketable securities + Accounts receivable + Shortterm notes receivable = $140 + $190 = $330
k. Accounts receivable turnover = Sales on account Average accounts
receivable* = $2,000 $185 = 10.81
l. Average collection period = 365 days Accounts receivable turnover*
= 365 10.81 = 33.8 days *See above
m. Inventory turnover = Cost of goods sold Average inventory* = $1,400
$150 = 9.33
n. Average sale period = 365 days Inventory turnover* = 365 9.33
= 39.1 days *See above
o. Times interest earned = Net operating income Interest expense
= $360 $30 = 12.00
p. Debt-to-equity ratio = Liabilities Stockholders' equity = $740 $1,300
= 0.57
LO: 2,3,4 Level: Medium
AICPA FN: Reporting
16-111

177. Financial statements for Qadri Company appear below:
Qadri Company
Year 2 Year 1
Current assets:
Cash and marketable securities........................... $ 120 $ 100
130
120
Inventory.............................................................
160
180
50
50
460
450
Noncurrent assets:
Plant & equipment, net....................................... 1,730 1,730
Total assets............................................................. $2,190 $2,180
60
50
160
200
270
350
Bonds payable.....................................................
280
300
550
650
120
120
Common stock, $10 par......................................
220
220
110
110
Retained earnings................................................ 1,190 1,080
Total stockholders equity...................................... 1,640 1,530
16-112

Qadri Company
Income Statement
Cost of goods sold.................................................. 1,610
Gross margin..........................................................
690
270
420
30
390
Income taxes (30%)...............................................
117
Net income............................................................. $ 273
dividends. The market price of a share of common stock on December 31, Year 2 was
$150.
Required:
a. Earnings per share of common stock.
c. Dividend yield ratio.
d. Return on total assets.
e. Return on common stockholders' equity.
f. Book value per share.
Ans:
= $220 $10 = 22
= $150 $12.14 = 12.4
16-113

c. Dividend yield ratio = Dividends per share* Market price per share
= $7.14 $150.00 = 4.76%
*Dividends per share = Common dividends Common shares**
= $157 22 = $7.14
**See above
d. Return on total assets = Adjusted net income* Average total assets**
= $294 $2,185 = 13.46%
= $273 + 30 (1 0.30) = $294
e. Return on common stockholders' equity = (Net income Preferred dividends)

f. Book value per share = Common stockholders' equity Number of common
shares outstanding* = $1,520 22 = $69.09
= $220 $10 = 22
LO: 2 Level: Medium
16-114
AICPA FN: Reporting

178. Maranville Corporation's most recent balance sheet and income statement appear
below:
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 170 $ 180
160
180
Inventory.............................................................
170
160
70
60
570
580
840
830
Total assets............................................................. $1,410 $1,410
Bonds payable........................................................
Preferred stock, $100 par value, 10%.................
$ 150 $ 160
40
40
50
50
240
250
90
100
330
350
200
200
400
400
140
140
340
320
1,080 1,060
$1,410 $1,410
16-115

Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$1,410
860
550
449
101
15
86
26
$ 60

Required:
a. Earnings per share (of common stock).
Ans:
= $2.36 $0.20 = 11.8
16-116

above)
= $0.10 $0.20 = 50.0%
d. Dividend yield ratio = Dividends per share (see above) Market price per
share = $0.10 $2.36 = 4.24%
= $70.5 $1,410 = 5.00%
= Net income + [Interest expense (1Tax rate)]
= $60 + 15 (1 0.30) = $70.5
f. Return on common stockholders' equity
= (Net income Preferred dividends) Average common stockholders' equity*
= ($60 $20) $870 = 4.60%
Number of common shares outstanding* = $880 200 shares = $4.40 per
share
LO: 2 Level: Medium
AICPA FN: Reporting
16-117

179. Isidro Corporation has provided the following financial data (in thousands of dollars):
Total assets.............................................................
Year 2 Year 1
$1,520 $1,490
$200
$400
$160
$380
$200
$400
$160
$320
Net income for Year 2 was $110 thousand. Interest expense was $21 thousand. The tax
rate was 30%. Dividends on common stock during Year 2 totaled $40 thousand.
Dividends on preferred stock totaled $10 thousand. The market price of common stock
at the end of Year 2 was $9.15 per share.
Required:
a. Earnings per share (of common stock).
Ans:
= $9.15 $0.50 = 18.3
above)
= $0.20 $0.50 = 40.0%
16-118

d. Dividend yield ratio = Dividends per share (see above) Market price per
share = $0.20 $9.15 = 2.19%
= $124.7 $1,505 = 8.29%
= $110 + 21 (1 0.30) = $124.7
f. Return on common stockholders' equity = (Net income Preferred dividends)
Number of common shares outstanding*
LO: 2 Level: Easy
AICPA FN: Reporting
180. Mikolajczyk Corporation's net income for the most recent year was $1,379,000. A
total of 100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $1.15 per share
and dividends on preferred stock were $1.30 per share.
Required:
Compute the earnings per share of common stock. Show your work!
Ans:
= ($1,379,000 $260,000) 100,000 shares = $11.19 per share
LO: 2 Level: Easy
AICPA FN: Reporting
16-119

181. Hoa Corporation's net income last year was $7,460,000. The dividend on common
stock were outstanding.
Required:
Compute the price-earnings ratio. Show your work!
Ans:
= $78.90 $14.06 = 5.61
*Earnings per share
= (Net Income - Preferred Dividends) Average number of common shares
outstanding = ($7,460,000 - $430,000) 500,000 shares = $14.06 per share
LO: 2 Level: Easy
AICPA FN: Reporting
182. Dupas Corporation's net income last year was $7,330,000. The dividend on common
stock were outstanding.
Required:
Compute the dividend payout ratio. Show your work!
Ans:
Dividend payout ratio = Dividends per share Earnings per share*
= $12.70 $13.98 = 0.91
*Earnings per share = (Net Income Preferred Dividends)
= ($7,330,000 $340,000) 500,000 shares = $13.98 per share
LO: 2 Level: Easy
16-120
AICPA FN: Reporting

183. Last year, Sheline Corporation's dividend on common stock was $13.00 per share and
the dividend on preferred stock was $2.10 per share. The market price of common
stock at the end of the year was $68.60 per share.
Required:
Compute the dividend yield ratio. Show your work!
Ans:
= $13.00 $68.60 = 0.19
LO: 2 Level: Easy
AICPA FN: Reporting
184. Allaman Corporation's most recent income statement appears below:

Gross margin..............................................
Income taxes (30%)...................................
Net income.................................................
$760,000
450,000
310,000
100,000
210,000
40,000
170,000
51,000
$119,000
The beginning balance of total assets was $930,000 and the ending balance was
$970,000.
Required:
Compute the return on total assets. Show your work!
16-121

Ans:
= $147,000 $950,000 = 15.5%
= $119,000 + 40,000 (1 0.30) = $147,000
LO: 2 Level: Easy
AICPA FN: Reporting
185. Excerpts from Orr Corporation's most recent balance sheet appear below:
Preferred stock.......................................................
Common stock.......................................................
Year 2
Year 1
$ 200,000 $ 200,000
400,000
400,000
390,000
390,000
420,000
350,000
$1,410,000 $1,340,000
Net income for Year 2 was $147,000. Dividends on common stock were $50,000 in
total and dividends on preferred stock were $27,000 in total.
Required:
Compute the return on common stockholders' equity. Show your work!
Ans:
Average common stockholders' equity* = ($147,000 $27,000) $1,175,000 =
10.2%
*Average common stockholders' equity = ($1,210,000 + $1,140,000) 2 = $1,175,000
LO: 2 Level: Easy
16-122
AICPA FN: Reporting

186. Data from Speir Corporation's most recent balance sheet appear below:
Preferred stock.......................................................
Common stock.......................................................
$ 200,000
300,000
380,000
490,000
$1,370,000
A total of 150,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year.
Required:
Compute the book value per share. Show your work!
Ans:
Book value per share = Common stockholders' equity Number of common shares
outstanding = $1,170,000 150,000 shares = $7.80 per share
LO: 2 Level: Easy
AICPA FN: Reporting
16-123

187. Financial statements for Rarick Company appear below:
Rarick Company
Year 2
Current assets:
Inventory.............................................................
Noncurrent assets:
Total assets.............................................................
Bonds payable.....................................................
Preferred stock, $10 par, 10%.............................
Common stock, $5 par........................................
16-124
Year 1
$ 120 $ 120
180
150
100
100
10
20
410
390
1,830 1,780
$2,240 $2,170
$ 130 $ 150
30
50
270
270
430
470
310
740
300
770
100
100
240
240
250
250
910
810
1,500 1,400
$2,240 $2,170

Rarick Company
Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$2,400
1,680
720
280
440
30
410
123
$ 287
Required:
a. Current ratio.
b. Acid-test ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned.
f. Debt-to-equity ratio.
Ans:
a. Current ratio = Current assets Current liabilities = $410 $430 = 0.95
b. Acid-test ratio = Quick assets* Current liabilities = $300 $430 = 0.70
*Quick assets = Cash + Marketable securities + Accounts receivable + Shortterm notes receivable = $120 + $180 = $300
c. Accounts receivable turnover = Sales on account Average accounts
receivable* = $2,400 $165 = 14.55
= 365 14.55 = 25.1 days
16-125

d. Inventory turnover = Cost of goods sold Average inventory*
= $1,680 $100 = 16.80
e. Times interest earned = Net operating income Interest expense
= $440 $30 = 14.67
f. Debt-to-equity ratio = Liabilities Stockholders' equity
= $740 $1,500 = 0.49
LO: 3,4 Level: Medium
16-126
AICPA FN: Reporting

188. Carleton Corporation's most recent balance sheet and income statement appear below:
Year 2
Assets
Current assets:
Cash....................................................................
Inventory.............................................................
Total assets.............................................................
Bonds payable........................................................
Year 1
30 $ 110
210
260
190
170
70
70
500
610
810
740
$1,310 $1,350
$ 140 $ 150
30
30
40
40
210
220
190
240
400
460
100
100
400
400
130
130
280
260
910
890
$1,310 $1,350
16-127

Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$1,260
770
490
400
90
26
64
19
$ 45
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
Ans:
a. Working capital = Current assets Current liabilities = $500 thousand $210
b. Current ratio = Current assets Current liabilities = $500 $210 = 2.38
c. Acid-test ratio = Quick assets* Current liabilities = $240 $210 = 1.14
d. Accounts receivable turnover = Sales on account Average accounts
receivable* = $1,260 $235 = 5.36
e. Average collection period = 365 days Accounts receivable turnover (see
above) = 365 days 5.36 = 68.1 days
16-128

f. Inventory turnover = Cost of goods sold Average inventory*
= $770 $180 = 4.28
g. Average sale period = 365 days Inventory turnover (see above)
= 365 days 4.28 = 85.3 days
LO: 3 Level: Medium
AICPA FN: Reporting
189. Excerpts from Beaty Corporation's most recent balance sheet (in thousands of dollars)
appear below:
Year 2 Year 1
Current assets:
Cash............................................
$ 70
$140
250
280
Inventory.....................................
150
140
20
20
$490
$580
Accounts payable........................
$150
$170
Accrued liabilities.......................
90
90
Notes payable, short term...........
80
80
$320
$340
Sales on account during the year totaled $1,320 thousand. Cost of goods sold was
$730 thousand.
Required:
a. Working capital.
b. Current ratio.
c. Acid-test ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
16-129

Ans:
a. Working capital = Current assets Current liabilities = $490 thousand $320
b. Current ratio = Current assets Current liabilities = $490 $320 = 1.53
c. Acid-test ratio = Quick assets* Current liabilities = $320 $320 = 1.00
d. Accounts receivable turnover = Sales on account Average accounts
receivable* = $1,320 $265 = 4.98
e. Average collection period = 365 days Accounts receivable turnover (see
above) = 365 days 4.98 = 73.3 days
f. Inventory turnover = Cost of goods sold Average inventory* = $730 $145
= 5.03
g. Average sale period = 365 days Inventory turnover (see above)
= 365 days 5.03 = 72.6 days
LO: 3 Level: Easy
AICPA FN: Reporting
190. Romaine Corporation's total current assets are $300,000, its noncurrent assets are
$360,000, and its stockholders' equity is $240,000.
Required:
Compute the company's working capital. Show your work!
Ans:
Working capital = Current assets Current liabilities = $300,000 $270,000 =
$30,000
LO: 3 Level: Easy
16-130
AICPA FN: Reporting

191. Wayment Corporation's total current assets are $310,000, its noncurrent assets are
$460,000, and its stockholders' equity is $260,000.
Required:
Compute the company's current ratio. Show your work!
Ans:
Current ratio = Current assets Current liabilities = $310,000 $270,000 = 1.15
LO: 3 Level: Easy
AICPA FN: Reporting
192. Data from Furnia Corporation's most recent balance sheet appear below:
Cash....................................
Marketable securities.........
Accounts receivables.........
Inventory............................
Current liabilities...............
$13,000
$21,000
$32,000
$52,000
$16,000
$118,000
Required:
Compute the company's acid-test ratio. Show your work!
Ans:
LO: 3 Level: Easy
AICPA FN: Reporting
16-131

193. Cozzolino Corporation has provided the following data:
Inventory............................
This Year
$118,000
$141,000
$687,000
$455,000
Last Year
$123,000
$165,000
Required:
Compute the accounts receivable turnover for this year. Show your work!
Ans:
Accounts receivable turnover = Sales on account Average accounts receivable*
= $687,000 $120,500 = 5.70
LO: 3 Level: Easy
AICPA FN: Reporting
194. Data from Ringwald Corporation's most recent balance sheet and income statement
appear below:
Inventory............................
This Year
$118,000
$164,000
$727,000
$481,000
Last Year
$103,000
$173,000
Required:
Compute the average collection period for this year:
16-132

Ans:
= 365 days 6.58 = 55.5 days
*Accounts receivable turnover = Sales on account Average accounts receivable** =
$727,000 $110,500 = 6.58
**Average accounts receivable = ($118,000 + $103,000) 2 = $110,500
LO: 3 Level: Easy
AICPA FN: Reporting
195. Hsieh Corporation has provided the following data:

Inventory............................
This Year
$104,000
$150,000
$879,000
$575,000
Last Year
$115,000
$157,000
Required:
Compute the inventory turnover for this year:
Ans:
= $575,000 $153,500 = 3.75
LO: 3 Level: Easy
AICPA FN: Reporting
16-133

196. Data from Buttler Corporation's most recent balance sheet and income statement
appear below:
Inventory............................
This Year
$134,000
$151,000
$864,000
$675,000
Last Year
$138,000
$171,000
Required:
Compute the average sale period for this year:
Ans:
= 365 days 4.19 = 87.1 days
*Inventory turnover = Cost of goods sold Average inventory*
= $675,000 $161,000 = 4.19
**Average inventory = ($151,000 + $171,000) 2 = $161,000
LO: 3 Level: Easy
16-134
AICPA FN: Reporting

197. Erke Corporation's most recent balance sheet and income statement appear below:
Year 2
Assets
Current assets:
Cash....................................................................
Inventory.............................................................
Total assets.............................................................
Bonds payable........................................................
Year 1
$ 130 $ 160
120
110
90
100
20
20
360
390
890
840
$1,250 $1,230
$ 190 $ 180
70
60
40
40
300
280
130
150
430
430
100
100
200
200
130
130
390
370
820
800
$1,250 $1,230
16-135

Income Statement
Gross margin..........................................................
Income taxes (30%)...............................................
Net income.............................................................
$1,150
710
440
358
82
18
64
19
$ 45
Required:
a. Times interest earned.
b. Debt-to-equity ratio.
Ans:
a. Times interest earned = Net operating income Interest expense
= $82 $18 = 4.56
b. Debt-to-equity ratio = Liabilities Stockholders' equity
= $430 $820 = 0.52
LO: 4 Level: Medium
AICPA FN: Reporting
198. Froemming Corporation's net operating income last year was $193,000; its interest
expense was $22,000; its total stockholders' equity was $950,000; and its total
liabilities were $400,000.
Required:
a. Times interest earned.
b. Debt-to-equity ratio.
16-136

Ans:
a. Times interest earned = Net operating income Interest expense
= $193,000 $22,000 = 8.77
b. Debt-to-equity ratio = Liabilities Stockholders' equity
= $400,000 $950,000 = 0.42
LO: 4 Level: Easy
AICPA FN: Reporting
199. Brandy Corporation has provided the following data from its most recent income
statement:
Net operating income.....................
Interest expense..............................
Net income before taxes.................
Income taxes..................................
Net income.....................................
$51,000
$37,000
$14,000
$4,000
$10,000
Required:
Compute the times interest earned ratio. Show your work!
Ans:
= $51,000 $37,000 = 1.38
LO: 4 Level: Easy
AICPA FN: Reporting
16-137

200. Molony Corporation has provided the following data from its most recent balance
sheet:
Total assets.....................................
$740,000
$610,000
$130,000
Required:
Compute the debt-to-equity ratio. Show your work!
Ans:
= $610,000 $130,000 = 4.69
LO: 4 Level: Easy
16-138
AICPA FN: Reporting

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Chapter 161

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Chapter 16 How Well Am I Doing?

--Financial Statement Analysis

AICPA BB: Critical Thinking

AICPA BB: Critical Thinking

7. An increase in the number of shares of common stock outstanding will decrease a

AICPA BB: Critical Thinking

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

AICPA BB: Critical Thinking

9. When computing return on common stockholders' equity, retained earnings should be

AICPA BB: Critical Thinking

AICPA BB: Critical Thinking

AICPA BB: Critical Thinking

AICPA BB: Critical Thinking

14. Short-term borrowing is not a source of working capital.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

The gross margin percentage is closest to:

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

What is Konbu's dividend yield ratio for last year?

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

The company's acid-test ratio is closest to:

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

This Year Last Year

The accounts receivable turnover for this year is closest to:

This Year Last Year

The average collection period for this year is closest to:

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 16 How Well Am I Doing?--Financial Statement Analysis

This Year Last Year

The inventory turnover for this year is closest to: