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Exam 13: Financial Statement Analysis

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Question 31

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Describe the differences between the liquidity ratios, solvency ratios and profitability ratios. Identify examples of each type of ratio as well.

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Liquidity ratios indic...

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Question 32

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The quick ratio although similar to the current ratio is more conservative.

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Question 33

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A company has an obligation to provide highly detailed information on its financial statements.

The Martin Company reported net income of $15,000 on gross sales of $80,000. The company has average total assets of $135,000, of which $102,000 is property, plant and equipment. What is the company's return on investment (rounded to the nearest decimal point) ?

Which of the following is (are) objective(s) of ratio analysis?

Financial statement analysis involves forms of comparison including:

Cost of goods sold divided by average inventory is the formula for which of these analytical measures?

Which type of approach should be used when evaluating corporate results using horizontal analysis?

Longwood Company had a current ratio of 3:1 at the end of Year 1. The asset section of the company's balance sheet is provided below: Required: 1) Compute Longwood Company's end-of-year working capital.2) Compute the company's quick (acid-test) ratio.3) The company has a debt agreement with its bank that authorizes the bank to call in its loan to the company if the company's current ratio falls below 3:1 as of the last day of any month during the term of the loan. During January Year 2, the company engaged in the three following transactions: (a) Collected $100,000 on account; (b) Purchased inventory on account, $50,000 (c) Paid accounts payable, $60,000 Will the company be in default after completing these transactions? Justify your answer.Round your answers to two decimal places. $\begin{array} { | l | r | r | } \hline \text { Cash } & & \$ 100,000 \\\hline \text { Accounts receivable } & \$ 400,000 & \\\hline \text { Less allowance for uncollectible } & 50,000 & 350,000 \\ \text { Accounts } & & \\\hline \text { Inventory } & & 550,000 \\\hline \text { Prepaid expenses } & & 74,000 \\\hline \text { Property, plant, \& equipment, net } & & 926,000 \\\hline \text { Total assets } & & \$ 2,000,000 \\\hline & & \\\hline\end{array}$

The current ratio is one of the most common measures of solvency.

The drawback of studying absolute amounts reported in financial statements is the problem of differing materiality levels.

Earnings before interest and taxes divided by interest expense is the formula for which of these analytical measures?

Milton Company has total current assets of $46,000, including inventory of $10,000, and current liabilities of $20,000. The company's current ratio is:

In terms of solvency, the larger the number of times interest is earned, the better.

Which ratio would you use to examine a company's ability to pay its debts in the short term?

On December 31, Year 1, Houston Company's total current assets were $560,000 and its total current liabilities were $420,000. On January 1, Year 2, Houston issued a long-term note to a bank for $30,000 cash.Required: (a) Compute Houston's working capital before and after issuing the note payable.(b) Compute Houston's current ratio before and after issuing the note payable. Round your answer to two decimal places.

The Dennis Company reported net income of $50,000 on sales of $300,000. The company has average total assets of $500,000 and average total liabilities of $100,000. What is the company's return on equity ratio?

Which of the following statements about financial statements is incorrect?

Which ratios measure a company's long-term debt paying ability and its financing structure?

As of December 31, Year 1, Gant Corporation had a current ratio of 1.29, quick ratio of 1.05, and working capital of $18,000. The company uses a perpetual inventory system and sells merchandise for more than it cost. On January 1, Year 2, Gant collected $5,200 of accounts receivable. As a result of this transaction, Gant's working capital will: