16 Jan Inventory turnover

ACC556 Financial Accounting for Managers

CHAPTER 13 EXERCISE

Question 1 Comprehensive income includes all revenues, expenses, gains, losses, and dividends.

Answers:

True

False

Question 2 A primary purpose of vertical analysis is to observe trends over a three-year period.

Answers:

True

False

Question 3 Leverage and return on equity are closely related.

Answers:

True

False

Question 4 Because pro forma earnings are based on specific rules, these amounts are highly reliable.

Answers:

True

False

Question 5 Which of the following income statement figures would probably be the best indicator of a company’s future performance?

Answers:

Total revenues

Income from operations

Net income

Gross profit

Question 6 The discontinued operations section of the income statement refers to

Answers:

discontinuance of a product line.

the income or loss on products that have been completed and sold.

obsolete equipment and discontinued inventory items.

the disposal of a significant component of a business.

Question 7 Patchett Company reported income before taxes of $800,000 and an extraordinary loss of $200,000. Assume that the company’s tax rate is 25%. What amounts will be reported on the income statement for income before irregular items and extraordinary items, respectively?

Answers:

$600,000 and $200,000

$600,000 and $150,000

$800,000 and $200,000

$800,000 and $150,000

Question 8 All of the following statements are true regarding comprehensive income except

Answers:

companies are required to report comprehensive income.

a company would add an unrealized loss on available-for-sale securities to net income to calculate comprehensive income.

comprehensive income does not include changes resulting from investments by stockholders.

comprehensive income does not include dividends to stockholders.

Question 9 Horizontal analysis of comparative financial statements includes the

Answers:

development of common size statements.

calculation of liquidity ratios.

calculation of dollar amount and percentage changes from financial statements over a period of time, as compared to a base year.

evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount.

Question 10 Assume the following cost of goods sold data for a company:

2015 $1,300,000

2014 1,200,000

2013 1,000,000

If 2013 is the base year, what is the percentage increase in cost of goods sold from 2013 to 2015?

Answers:

130%

30%

70%

20%

Question 11 The best way to study the relationship of the components within a financial statement is to prepare

Answers:

common size statements.

a trend analysis.

profitability analysis.

ratio analysis.

Question 12 The following schedule is a display of what type of analysis?

Amount Percent

Current assets $100,000 25%

Property, plant, and equipment 300,000 75%

Total assets $400,000 100%

Answers:

Horizontal analysis

Differential analysis

Vertical analysis

Ratio analysis

Question 13 Stockholders are most interested in evaluating

Answers:

liquidity.

solvency.

profitability.

marketability.

Question 14 Somen to Park Corporation had net credit sales of $4,060,000 and cost of goods sold of $3,000,000 for the year. The Accounts Receivable balances at the beginning and end of the year were $650,000 and $750,000, respectively. The accounts receivable turnover was

Answers:

6.7 times.

6.2 times.

5.8 times.

6.4 times.

Question 15 BVI Corporation had net income of $1,600,000 and paid dividends to common stockholders of $400,000 in 2014. The weighted average number of shares outstanding in 2014 was 500,000 shares. BVI Corporation’s common stock is selling for $50 per share on the NASDAQ. BVI Corporation’s payout ratio for 2014 is

Answers:

$5 per share.

25%.

20%.

12.5%.

Question 16 A successful grocery store would probably have

Answers:

a low inventory turnover.

a high inventory turnover.

zero profit margin.

low volume.

Question 17 The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments $ 45,000

Accounts receivable (net) 30,000

Inventory 15,000

Property, plant and equipment 210,000

Total Assets $300,000

Liabilities and Stockholders’ Equity

Current liabilities $ 60,000

Long-term liabilities 90,000

Stockholders’ equity—common 15,000

Total Liabilities and Stockholders’ Equity $300,000

Income Statement

Sales revenue $ 121,000

Cost of goods sold 66,000

Gross margin 55,000

Operating expenses 30,000

Net income $ 25,000

Number of shares of common stock 6,000

Market price of common stock $20

Dividends per share on common stock .50

Cash provided by operations $40,000

What is the current ratio for this company?

Question 18 For each of the ratios listed below, indicate by the appropriate code letter, whether it is a liquidity ratio, a profitability ratio, or a solvency ratio.

Price-earnings ratio

Return on assets

Accounts receivable turnover ratio

Earnings per share

Payout ratio

Current cash debt coverage

Current ratio

Debt to assets ratio

Free cash flow

Inventory turnover

All Answer Choices

A. Profitability ratio

B. Liquidity ratio

C. Solvency ratio