File: 17e_GNB_CH15_TB, Chapter 15, Financial Statement Analysis

True/False

[QUESTION]
1. Vertical analysis of financial statements is accomplished by preparing common-size statements.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-01
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
2. In determining whether a company's financial condition is improving or deteriorating over time, horizontal
analysis of financial statement data would be more useful than vertical analysis.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-01
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
3. A common-size financial statement is a vertical analysis in which each financial statement account is
expressed as a percentage.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-01
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
4. The acid-test ratio is usually greater than the current ratio.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
5. Liquidity refers to how quickly an asset can be converted into cash.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
6. If the acid-test ratio is less than one, then paying off some current liabilities with cash will increase the acid-
test (quick) ratio.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
7. A company could improve its acid-test ratio by selling some equipment it no longer needs for cash.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
8. Acquiring land by taking out a long-term mortgage will not affect the current ratio.
Answer: T
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
9. Purchasing marketable securities with cash will have no effect on a company's acid-test ratio.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
10. As the accounts receivable turnover ratio decreases, the average collection period increases.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
11. If a company’s operating cycle is much longer than its average payment period for suppliers, it creates the
need to borrow money to fund its inventories and accounts receivable.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
12. All other things the same, purchasing inventory would decrease the inventory turnover ratio.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
13. Buying inventory in large lots to take advantage of quantity discounts can be responsible for a high
inventory turnover ratio.
Answer: F
Difficulty: 12 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
14. All other things the same, when a company increases its inventories in anticipation of later higher sales,
the accounts receivable turnover ratio for the current period increases.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
15. All other things the same, purchasing merchandise inventory would have no effect on the accounts
receivable turnover ratio at a retailer.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
16. All other things the same, when a customer purchases an item for cash, the accounts receivable turnover
ratio increases.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
17. As the inventory turnover increases, the average sales period decreases.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
18. To increase total asset turnover, management must either increase sales or reduce total stockholders’
equity.
Answer: F
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
19. The formula for the average sale period is: Average sale period = Accounts receivable turnover ÷
Inventory turnover.
Answer: F
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
20. The formula for total asset turnover is: Total asset turnover = Total assets ÷ Total stockholders’ equity.
Answer: F
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
21. A company whose inventory turnover ratio is much slower than the average for its industry may have too
much inventory or the wrong sorts of inventory.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
22. All other things the same, those who hold the company’s debt (i.e., its creditors) would like a low debt-to-
equity ratio to provide a buffer of protection.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
23. All other things the same, if long-term debt is exchanged for short-term debt, the debt-to-equity ratio will
be unchanged.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
24. The times interest earned ratio is based on net income because that is the amount of earnings that is
available for making interest payments. Interest expense is deducted before taxes are determined; creditors
have first claim on the earnings before taxes are paid.
Answer: F
Difficulty: 3 Hard
Learning Objective: 15-04
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
25. Issuing common stock will decrease a company's financial leverage.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
26. The formula for the times interest earned ratio is: Times interest earned = Earnings before interest
expense and income taxes ÷ Interest expense.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
27. If a company's return on assets is substantially lower than its cost of borrowing, then the common
stockholders would normally want the company to have a relatively high debt/equity ratio.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-04
Learning Objective: 15-05
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
28. The formula for the return on equity is: Return on equity = Net income ÷ Average total stockholders'
equity.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
29. When computing the return on equity, retained earnings should be excluded from the average total
stockholders’ equity.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
30. When computing the return on total assets, the interest expense is added back to net income to show
what earnings would have been if the company had no debt.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
31. When a company sells used equipment for a loss, the net profit margin percentage is unaffected.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
32. All other things the same, if a company uses long-term debt to purchase land to develop in the future, the
company’s return on total assets will decrease.
Answer: T
Difficulty: 3 Hard
Learning Objective: 15-05
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
33. If a retailer sells a product whose contribution margin equals the gross margin percentage, the gross
margin percentage will be unaffected by the transaction.
Answer: T
Difficulty: 3 Hard
Learning Objective: 15-05
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
34. The gross margin percentage is computed by dividing the gross margin by net income before interest and
taxes.
Answer: F
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
35. The formula for the net profit margin percentage is: Net profit margin percentage = Net income ÷ Sales.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
36. When fixed costs are included in the cost of goods sold, the gross margin percentage should increase and
decrease with sales volume.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
37. The gross margin percentage is computed by dividing sales by the gross margin.
Answer: F
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
38. A high price-earnings ratio means that investors are willing to pay a premium for the company’s stock.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
39. An increase in the number of shares of common stock outstanding will increase a company's price-
earnings ratio if the market price per share remains unchanged.
Answer: T
Difficulty: 3 Hard
Learning Objective: 15-06
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
40. The dividend payout ratio is equal to the dividend per share divided by the earnings per share.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
41. All other things the same, if the company purchases equipment on credit, this transaction would have no
impact on the company’s book value per share.
Answer: T
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
42. Purchasing inventory on credit increases the book value per share of a retailer.
Answer: F
Difficulty: 3 Hard
Learning Objective: 15-06
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
43. The price-earnings ratio is determined by dividing market price per share of stock by the earnings per
share.
Answer: T
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
44. Earnings per share is computed by multiplying net income by the average number of common shares
outstanding.
Answer: F
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

Multiple Choice

[QUESTION]
45. Selling used equipment at book value for cash will:
A) increase working capital.
B) decrease working capital.
C) decrease the debt-to-equity ratio.
D) increase net income.
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
46. If current assets exceed current liabilities, prepaying an expense on the last day of the year will:
A) decrease the current ratio.
B) increase the acid-test ratio.
C) decrease the acid-test ratio.
D) increase the current ratio.
Answer: C
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
47. Zack Company has a current ratio of 2.5. What will be the effect of a purchase of inventory with cash on
the acid-test ratio and on working capital?

Acid-Test Ratio Working Capital

A) decrease decrease
B) decrease no effect
C) no effect decrease
D) no effect no effect
Answer: B
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
[QUESTION]
48. Norton Inc. could improve its current ratio of 2 by:
A) paying a previously declared stock dividend.
B) writing off an uncollectible receivable.
C) selling merchandise on credit at a profit.
D) purchasing inventory on credit.
Answer: C
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AACSB: Analytic
AICPA: FN Measurement
Source: CMA, adapted
Feedback:

[QUESTION]
49. 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.
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
50. A company’s current ratio is greater than 1. Purchasing raw materials on credit would:
A) increase the current ratio.
B) decrease the current ratio.
C) increase working capital.
D) decrease working capital.
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Source: CMA, adapted
Feedback:

[QUESTION]
51. Sand Company has an acid-test ratio of 0.8. Which of the following actions would improve the acid-test
ratio?
A) Collect some accounts receivable.
B) Acquire some inventory on account.
C) Sell some equipment for cash.
D) Use cash to pay off some accounts payable.
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
52. A company’s current ratio and its acid-test ratio are both greater than 1. Payment of an account payable
would:
A) increase the current ratio but the acid-test ratio would not be affected.
B) increase the acid-test ratio but the current ratio would not be affected.
C) increase both the current and acid-test ratios.
D) decrease both the current and acid-test ratios.
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Source: CMA, adapted
Feedback:

[QUESTION]
53. Which of the following actions would improve a current ratio of 0.8?
A) Use cash to pay off some current liabilities.
B) Purchase additional marketable securities with cash.
C) Acquire a parcel of land in exchange for common stock.
D) Purchase additional inventory on credit.
Answer: D
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
54. Accounts receivable turnover will normally decrease as a result of:
A) the write-off of an uncollectible account against the allowance for bad debts.
B) a significant sales volume decrease near the end of the accounting period.
C) an increase in cash sales in proportion to credit sales.
D) a change in credit policy to lengthen the period for cash discounts.
Answer: D
Difficulty: 3 Hard
Learning Objective: 15-03
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
55. The gross margin percentage is equal to:
A) (Net operating income + Selling and administrative expenses)/Sales
B) Net operating income/Sales
C) Cost of goods sold/Sales
D) Cost of goods sold/Net income
Answer: A
Difficulty: 3 Hard
Learning Objective: 15-05
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
56. Which of the following is not a source of financial leverage?
A) Bonds payable.
B) Accounts payable.
C) Taxes payable.
D) Prepaid rent.
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
57. Which one of the following statements about book value per 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.
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Source: CMA, adapted
Feedback:

[QUESTION]
58. 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 price-earnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
59. The Seabury Corporation has a current ratio of 3.5 and an acid-test ratio of 2.8. The corporation's current
assets consist of cash, marketable securities, accounts receivable, and inventories. Inventory equals $49,000.
Seabury Corporation's current liabilities must be:
A) $70,000
B) $100,000
C) $49,000
D) $125,000
Answer: A
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Current assets = Quick assets + Inventory
Current assets = Quick assets + $49,000

Acid-test ratio = Quick assets ÷ Current liabilities

2.8 = Quick assets ÷ Current liabilities
Quick assets = 2.8 × Current liabilities

Current ratio = Current assets ÷ Current liabilities

3.5 = Current assets ÷ Current liabilities
3.5 = (Quick assets + $49,000) ÷ Current liabilities
3.5 = [(2.8 × Current liabilities) + $49,000] ÷ Current liabilities
3.5 = 2.8 + ($49,000 ÷ Current liabilities)
3.5 – 2.8 = $49,000 ÷ Current liabilities
0.7 = $49,000 ÷ Current liabilities
Current liabilities = $49,000 ÷ 0.7 = $70,000

[QUESTION]
60. Data from Fontecchio Corporation's most recent balance sheet appear below:
 Cash........................................... $18,000
Marketable securities.................. $24,000
Accounts receivable.................... $39,000
Short-term notes receivable........ $0
Inventory..................................... $60,000
Prepaid expenses....................... $14,000
Current liabilities......................... $120,000

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

A) 0.35
B) 0.15
C) 0.68
D) 0.79
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $18,000 + $24,000 + $39,000 + $0 = $81,000
Acid-test ratio = Quick assets ÷ Current liabilities
= $81,000 ÷ $120,000 = 0.675

[QUESTION]
61. Feiler Corporation has total current assets of $483,000, total current liabilities of $347,000, total
stockholders’ equity of $1,057,000, total net plant and equipment of $1,031,000, total assets of $1,514,000,
and total liabilities of $457,000. The company’s current ratio is closest to:
A) 0.32
B) 0.30
C) 1.39
D) 0.95
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $483,000 ÷ $347,000 = 1.39 (rounded)

[QUESTION]
62. Gnas Corporation's total current assets are $210,000, its noncurrent assets are $590,000, its total current
liabilities are $160,000, its long-term liabilities are $490,000, and its stockholders' equity is $150,000. The
current ratio is closest to:
A) 1.31
B) 0.76
C) 0.33
D) 0.36
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $210,000 ÷ $160,000 = 1.3125

[QUESTION]
63. Dratif Corporation's working capital is $33,000 and its current liabilities are $80,000. The corporation's
current ratio is closest to:
A) 1.41
B) 0.59
C) 3.42
D) 0.41
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Current assets = Working capital + Current liabilities
= $80,000 + $33,000 = $113,000
Current ratio = Current assets ÷ Current liabilities
= $113,000 ÷ $80,000 = 1.4125

[QUESTION]
64. Dennisport Corporation has an acid-test ratio of 2.5. It has current liabilities of $40,000 and noncurrent
assets of $70,000. The corporation's current assets consist of cash, marketable securities, accounts
receivable, prepaid expenses, and inventory; it has no short-term notes receivable. If Dennisport's current
ratio is 3.1, its inventory and prepaid expenses must be:
A) $12,400
B) $24,000
C) $30,000
D) $40,000
Answer: B
Difficulty: 3 Hard
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Current ratio = Current assets ÷ Current liabilities
3.1 = Current assets ÷ $40,000
Current assets = $124,000

Acid-test ratio = (Cash + Marketable securities + Accounts receivable + Short-term notes receivable) ÷
Current liabilities
2.5 = (Cash + Marketable securities + Accounts receivable + 0) ÷ $40,000
Cash + Marketable securities + Accounts receivable = $100,000

Current assets = Cash + Marketable securities + Accounts receivable + Prepaid expenses + Inventory
$124,000 = $100,000 + Prepaid expenses + Inventory
Prepaid expenses + Inventory = $24,000

[QUESTION]
65. Calin Corporation has total current assets of $615,000, total current liabilities of $230,000, total
stockholders’ equity of $1,183,000, total net plant and equipment of $958,000, total assets of $1,573,000, and
total liabilities of $390,000. The company’s working capital is:
A) $615,000
B) $1,183,000
C) $385,000
D) $958,000
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Working capital = Current assets - Current liabilities
= $615,000 – $230,000 = $385,000

[QUESTION]
66. McRae Corporation's total current assets are $380,000, its noncurrent assets are $500,000, its total
current liabilities are $340,000, its long-term liabilities are $250,000, and its stockholders' equity is $290,000.
Working capital is:
A) $380,000
B) $40,000
C) $250,000
D) $290,000
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Working capital = Current assets – Current liabilities
= $380,000 – $340,000 = $40,000

[QUESTION]
67. Erastic Corporation has $14,000 in cash, $8,000 in marketable securities, $34,000 in account receivable,
$40,000 in inventories, and $42,000 in current liabilities. The corporation’s current assets consist of cash,
marketable securities, accounts receivable, and inventory. The corporation’s acid-test ratio is closest to:
A) 1.33
B) 0.81
C) 2.29
D) 1.14
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Quick assets = Cash + Marketable securities + Accounts receivable
= $14,000 + $8,000 + $34,000 = $56,000

Acid-test ratio = Quick assets ÷ Current liabilities = $56,000 ÷ $42,000 = 1.33

[QUESTION]
68. Windham Corporation has current assets of $400,000 and current liabilities of $500,000. Windham
Corporation's current ratio would be increased by:
A) the purchase of $100,000 of inventory on account.
B) the payment of $100,000 of accounts payable.
C) the collection of $100,000 of accounts receivable.
D) refinancing a $100,000 long-term loan with short-term debt.
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Source: CMA, adapted
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $400,000 ÷ $500,000 = 0.80

Current ratio = Current assets ÷ Current liabilities

= ($400,000 + $100,000) ÷ ($500,000 + $100,000) = 0.833

[QUESTION]
69. Stimac Corporation has total cash of $210,000, no marketable securities, total current receivables of
$281,000, total inventory of $151,000, total prepaid expenses of $53,000, total current assets of $695,000,
total current liabilities of $261,000, total stockholders’ equity of $1,014,000, total assets of $1,415,000, and
total liabilities of $401,000. The company’s acid-test (quick) ratio is closest to:
A) 2.08
B) 1.73
C) 2.66
D) 1.88
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Acid-test (quick) ratio = Quick assets* ÷ Current liabilities
= $491,000 ÷ $261,000 = 1.88 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $210,000 + $0 + $281,000 = $491,000

[QUESTION]
70. Orem Corporation's current liabilities are $75,000, its long-term liabilities are $225,000, and its working
capital is $100,000. If the corporation's debt-to-equity ratio is 0.30, total long-term assets must equal:
A) $1,000,000
B) $1,300,000
C) $1,125,000
D) $1,225,000
Answer: C
Difficulty: 3 Hard
Learning Objective: 15-02
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Working capital = Current assets – Current liabilities
$100,000 = Current assets – $75,000
Current assets = $100,000 + $75,000 = $175,000

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

0.30 = ($75,000 + $225,000) ÷ Stockholders' equity
Stockholders’ equity = ($75,000 + $225,000) ÷ 0.30 = $1,000,000

Total assets = Total liabilities + Stockholders' equity

Current assets + Long-term assets = Current liabilities + Long-term liabilities + Stockholders' equity
$175,000 + Long-term assets = $75,000 + $225,000 + $1,000,000
Long-term assets = $75,000 + $225,000 + $1,000,000 – $175,000 = $1,125,000

[QUESTION]
71. Irawaddy Company, a retailer, had cost of goods sold of $230,000 last year. The beginning inventory
balance was $24,000 and the ending inventory balance was $22,000. The company's average sale period
was closest to:
A) 36.5 days
B) 73.0 days
C) 38.1 days
D) 34.9 days
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average inventory balance = ($24,000 + $22,000) ÷ 2 = $23,000

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $230,000 ÷ $23,000 = 10

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 10 = 36.5 days

[QUESTION]
72. Harris Corporation, a retailer, had cost of goods sold of $290,000 last year. The beginning inventory
balance was $26,000 and the ending inventory balance was $24,000. The corporation's inventory turnover
was closest to:
A) 12.08
B) 11.60
C) 5.80
D) 11.15
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average inventory balance = ($26,000 + $24,000) ÷ 2 = $25,000

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $290,000 ÷ $25,000 = 11.6

[QUESTION]
73. Natcher Corporation’s accounts receivable at the end of Year 2 was $126,000 and its accounts receivable
at the end of Year 1 was $130,000. The company’s inventory at the end of Year 2 was $127,000 and its
inventory at the end of Year 1 was $120,000. Sales, all on account, amounted to $1,380,000 in Year 2. Cost
of goods sold amounted to $800,000 in Year 2. The company’s operating cycle for Year 2 is closest to:
A) 44.7 days
B) 17.3 days
C) 62.8 days
D) 90.2 days
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $800,000 ÷ $123,500 = 6.48 (rounded)
*Average inventory =
($127,000 + $120,000) ÷ 2 = $123,500
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 6.48 = 56.3 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,380,000 ÷ $128,000 = 10.78 (rounded)
*Average accounts receivable =
($126,000 + $130,000) ÷ 2 = $128,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 10.78 = 33.9 days (rounded)
Operating cycle = Average sale period + Average collection period
= 56.3 days + 33.9 days = 90.2 days

[QUESTION]
74. Kopas Corporation has provided the following data:

This Year Last Year

Accounts receivable....... $89,000 $107,000
Inventory......................... $160,000 $156,000
Sales on account............ $627,000
Cost of goods sold.......... $488,000

The inventory turnover for this year is closest to:

A) 3.09
B) 0.98
C) 1.03
D) 3.05
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average inventory balance = ($160,000 + $156,000) ÷ 2 = $158,000
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $488,000 ÷ $158,000 = 3.09 (rounded)

[QUESTION]
75. Granger Corporation had $180,000 in sales on account last year. The beginning accounts receivable
balance was $10,000 and the ending accounts receivable balance was $18,000. The corporation's average
collection period was closest to:
A) 20.3 days
B) 28.4 days
C) 36.5 days
D) 56.8 days
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average accounts receivable balance = ($10,000 + $18,000) ÷ 2 = $14,000

Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance

= $180,000 ÷ $14,000 = 12.86

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 12.86 = 28.4 days

[QUESTION]
76. During the year just ended, the retailer James Corporation purchased $425,000 of inventory. The
inventory balance at the beginning of the year was $175,000. If the cost of goods sold for the year was
$450,000, then the inventory turnover for the year was:
A) 2.77
B) 2.57
C) 3.00
D) 2.62
Answer: A
Difficulty: 3 Hard
Learning Objective: 15-03
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Cost of goods sold = Beginning inventory + Purchases – Ending inventory
$450,000 = $175,000 + $425,000 – Ending inventory
Ending inventory = $175,000 + $425,000 – $450,000 = $150,000
Average inventory balance = (Beginning inventory balance + Ending inventory balance)/2
= ($175,000 + $150,000)/2 = $162,500
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $450,000 ÷ $162,500 = 2.77 (rounded)

[QUESTION]
77. Laverde Corporation has provided the following data:

Year 2 Year 1
Inventory................... $185,000 $200,000
Total assets............... $1,489,000 $1,470,000
Sales......................... $1,220,000

The company’s total asset turnover for Year 2 is closest to:

A) 1.22
B) 7.60
C) 0.13
D) 0.82
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,220,000 ÷ $1,479,500 = 0.82 (rounded)
*Average total assets = ($1,489,000 + $1,470,000) ÷ 2 = $1,479,500

[QUESTION]
78. Spomer Corporation’s inventory at the end of Year 2 was $114,000 and its inventory at the end of Year 1
was $120,000. Cost of goods sold amounted to $710,000 in Year 2. The company’s inventory turnover for
Year 2 is closest to:
A) 5.92
B) 1.05
C) 6.07
D) 6.23
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $710,000 ÷ $117,000 = 6.07 (rounded)
*Average inventory =
($114,000 + $120,000) ÷ 2 = $117,000

[QUESTION]
79. Frantic Corporation had $130,000 in sales on account last year. The beginning accounts receivable
balance was $10,000 and the ending accounts receivable balance was $16,000. The corporation's accounts
receivable turnover was closest to:
A) 5.00
B) 13.00
C) 10.00
D) 8.13
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*
= $130,000 ÷ $13,000 = 10
*Average accounts receivable balance = ($10,000 + $16,000) ÷ 2 = $13,000

[QUESTION]
80. Data from Keniston Corporation's most recent balance sheet and income statement appear below:

This Year Last Year

Accounts receivable....... $128,000 $114,000
Inventory......................... $228,000 $193,000
Sales on account............ $813,000
Cost of goods sold.......... $597,000

The average collection period for this year is closest to:

A) 39.1 days
B) 45.1 days
C) 54.3 days
D) 57.5 days
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average accounts receivable balance = ($128,000 + $114,000) ÷ 2 = $121,000
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $813,000 ÷ $121,000 = 6.72 (rounded)
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 6.72 = 54.3 days (rounded)

[QUESTION]
81. Louie Corporation has provided the following data:

Year 2 Year 1
Accounts receivable........ $269,000 $290,000
Inventory.......................... $190,000 $160,000
Sales, on account............ $1,340,000
Cost of goods sold........... $860,000

The company’s operating cycle for Year 2 is closest to:

A) 81.0 days
B) 150.5 days
C) 79.2 days
D) 9.7 days
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $860,000 ÷ $175,000 = 4.91 (rounded)
*Average inventory =
($190,000 + $160,000) ÷ 2 = $175,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 4.91 = 74.3 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,340,000 ÷ $279,500 = 4.79 (rounded)
*Average accounts receivable =
($269,000 + $290,000) ÷ 2 = $279,500
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 4.79 = 76.2 days (rounded)

Operating cycle = Average sale period + Average collection period

= 74.3 days + 76.2 days = 150.5 days

[QUESTION]
82. Last year Truro Corporation purchased $800,000 of inventory. The cost of goods sold was $750,000 and
the ending inventory was $125,000. The inventory turnover for the year was:
A) 6.0
B) 7.5
C) 6.4
D) 8.0
Answer: B
Difficulty: 3 Hard
Learning Objective: 15-03
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Ending inventory balance = Beginning inventory balance + Purchases – Cost of goods sold
$125,000 = Beginning inventory balance + $800,000 – $750,000
Beginning inventory balance = $125,000 – $800,000 + $750,000 = $75,000

Average inventory balance = (Beginning inventory balance + Ending inventory balance)/2

= ($75,000 + $125,000)/2 = $100,000

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $750,000 ÷ $100,000 = 7.5

[QUESTION]
83. The accounts receivable for Note Corporation was $240,000 at the beginning of the year and $260,000 at
the end of the year. If the accounts receivable turnover for the year was 8 and 20% of the total sales were
cash sales, the total sales for the year were:
A) $2,600,000
B) $2,000,000
C) $2,400,000
D) $2,500,000
Answer: D
Difficulty: 3 Hard
Learning Objective: 15-03
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
8 = Sales on account ÷ [($240,000 + $260,000)/2]
8 = Sales on account ÷ $250,000
Sales on account = 8 × $250,000 = $2,000,000
Total sales = Cash sales + Sales on account
Total sales = (0.20 × Total sales) + $2,000,000
0.8 × Total sales = $2,000,000
Total sales = $2,000,000 ÷ 0.8 = $2,500,000

[QUESTION]
84. Smay Corporation has provided the following data:

This Year Last Year

Accounts receivable....... $107,000 $108,000
Inventory......................... $179,000 $187,000
Sales on account............ $654,000
Cost of goods sold.......... $461,000

The accounts receivable turnover for this year is closest to:

A) 1.01
B) 0.99
C) 6.08
D) 6.11
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average accounts receivable balance = ($107,000 + $108,000) ÷ 2 = $107,500
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $654,000 ÷ $107,500 = 6.08 (rounded)

[QUESTION]
85. Rawe Corporation’s accounts receivable at the end of Year 2 was $329,000 and its accounts receivable at
the end of Year 1 was $280,000. Sales, all on account, amounted to $1,350,000 in Year 2. The company’s
average collection period for Year 2 is closest to:
A) 1.2 days
B) 1.0 days
C) 82.4 days
D) 89.0 days
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,350,000 ÷ $304,500 = 4.43 (rounded)
*Average accounts receivable =
($329,000 + $280,000) ÷ 2 = $304,500

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 4.43 = 82.4 days (rounded)

[QUESTION]
86. Pascarelli Corporation’s inventory at the end of Year 2 was $122,000 and its inventory at the end of Year
1 was $150,000. Cost of goods sold amounted to $870,000 in Year 2. The company’s average sale period for
Year 2 is closest to:
A) 230.1 days
B) 51.2 days
C) 57.0 days
D) 32.3 days
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $870,000 ÷ $136,000 = 6.40 (rounded)
*Average inventory =
($122,000 + $150,000) ÷ 2 = $136,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 6.40 = 57.0 days (rounded)

[QUESTION]
87. Deflorio Corporation’s inventory at the end of Year 2 was $156,000 and its inventory at the end of Year 1
was $140,000. The company’s total assets at the end of Year 2 were $1,416,000 and its total assets at the
end of Year 1 were $1,390,000. Sales amounted to $1,320,000 in Year 2. The company’s total asset turnover
for Year 2 is closest to:
A) 0.94
B) 1.06
C) 5.38
D) 0.19
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,320,000 ÷ $1,403,000 = 0.94 (rounded)
*Average total assets = ($1,416,000 + $1,390,000) ÷ 2 = $1,403,000

[QUESTION]
88. Data from Estrin Corporation's most recent balance sheet and income statement appear below:

This Year Last Year

Accounts receivable....... $109,000 $106,000
Inventory......................... $139,000 $158,000
Sales on account............ $787,000
Cost of goods sold.......... $501,000

The average sale period for this year is closest to:

A) 101 days
B) 50 days
C) 108 days
D) 45 days
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average inventory balance = ($139,000 + $158,000) ÷ 2 = $148,500
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $501,000 ÷ $148,500 = 3.37 (rounded)
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 3.37 = 108 days (rounded)

[QUESTION]
89. Shipley Corporation has provided the following data from its most recent balance sheet:

Total assets............................. $760,000

Total liabilities.......................... $590,000
Total stockholders' equity........ $170,000

The debt-to-equity ratio is closest to:

A) 0.29
B) 3.47
C) 0.22
D) 0.78
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $590,000 ÷ $170,000 = 3.47

[QUESTION]
90. Neelty Corporation has interest expense of $16,000, sales of $600,000, a tax rate of 30%, and after-tax
net income of $56,000. The company’s times interest earned ratio is closest to:
A) 6.0
B) 5.0
C) 4.5
D) 3.5
Answer: A
Difficulty: 3 Hard
Learning Objective: 15-04
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
After-tax net income = Earnings before taxes and interest – Taxes – Interest expense
After-tax net income = Earnings before taxes and interest – [0.30 × (Earnings before taxes and interest –
Interest expense)] – Interest expense
After-tax net income = (0.70 × Earnings before taxes and interest) – (0.70 × Interest expense)
$56,000 = (0.70 × Earnings before taxes and interest) – (0.70 × $16,000)
$56,000 = 0.70 × Earnings before taxes and interest – $11,200
0.70 × Earnings before taxes and interest = $56,000 + $11,200
Earnings before taxes and interest = ($56,000 + $11,200) ÷ 0.70 = $96,000

Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $96,000 ÷ $16,000 = 6
[QUESTION]
91. Falmouth Corporation's debt to equity ratio is 0.6. Current liabilities are $120,000, long term liabilities are
$360,000, and working capital is $140,000. Total assets of the corporation must be:
A) $600,000
B) $1,200,000
C) $800,000
D) $1,280,000
Answer: D
Difficulty: 3 Hard
Learning Objective: 15-04
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
0.6 = ($120,000 + $360,000) ÷ Stockholders’ equity
Stockholders’ equity = $480,000 ÷ 0.6 = $800,000
Total assets = Total liabilities + Stockholders’ equity
= $480,000 + $800,000 = $1,280,000

[QUESTION]
92. Klein Corporation has provided the following data:

Year 2 Year 1
Total assets........................... $1,337,000 $1,310,000
Total liabilities........................ $598,000 $580,000
Total stockholders' equity...... $739,000 $730,000

The company’s equity multiplier is closest to:

A) 1.24
B) 0.56
C) 1.80
D) 0.81
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,323,500 ÷ $734,500 = 1.80 (rounded)
*Average total assets = ($1,337,000 + $1,310,000) ÷ 2 = $1,323,500
**Average stockholders' equity = ($739,000 + $730,000) ÷ 2 = $734,500

[QUESTION]
93. Last year Javer Corporation had net income of $200,000, income tax expense of $74,000, and interest
expense of $20,000. The corporation's times interest earned was closest to:
A) 10.0
B) 11.0
C) 5.3
D) 14.7
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= ($200,000 + $74,000 + $20,000) ÷ $20,000 = 14.7

[QUESTION]
94. The times interest earned ratio of Whitney Corporation is 3.0. The interest expense for the year is
$21,000, and the corporation's tax rate is 40%. The corporation's after-tax net income must be:
A) $63,000
B) $25,200
C) $30,000
D) $42,000
Answer: B
Difficulty: 3 Hard
Learning Objective: 15-04
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
3.0 = Earnings before interest expense and income taxes ÷ $21,000
Earnings before interest expense and income taxes = 3.0 × $21,000 = $63,000
Earnings after interest expense = $63,000 – $21,000 = $42,000
Income tax = 0.40 × $42,000 = $16,800
After-tax net income = $42,000 – $16,800 = $25,200

[QUESTION]
95. A portion of Lapore Corporation’s Balance Sheet appears below:

Liabilities and Stockholders' Equity Year 2 Year 1

Current liabilities:
Accounts payable............................................. $ 209,000 $ 200,000
Accrued liabilities.............................................. 27,000 30,000
Notes payable, short term................................. 94,000 90,000
Total current liabilities.......................................... 330,000 320,000
Bonds payable..................................................... 280,000 280,000
Total liabilities...................................................... 610,000 600,000
Stockholders' equity:
Common stock, $4 par value............................ 360,000 360,000
Additional paid-in capital................................... 70,000 70,000
Retained earnings............................................. 589,000 570,000
Total stockholders' equity..................................... 1,019,000 1,000,000
Total liabilities & stockholders' equity................... $1,629,000 $1,600,000
The company’s debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.60
B) 0.37
C) 0.39
D) 0.27
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $610,000 ÷ $1,019,000 = 0.60 (rounded)

[QUESTION]
96. Wittels Corporation has provided the following data:

Year 2 Year 1
Total assets................................ $1,253,000 $1,230,000
Total liabilities............................. $586,000 $570,000
Total stockholders' equity........... $667,000 $660,000

In Year 2, the company’s net operating income was $42,571, its net income before taxes was $21,571, and its
net income was $15,100. The company’s equity multiplier is closest to:
A) 1.14
B) 0.53
C) 0.88
D) 1.87
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,241,500 ÷ $663,500 = 1.87 (rounded)
*Average total assets = ($1,253,000 + $1,230,000) ÷ 2 = $1,241,500
**Average stockholders' equity = ($667,000 + $660,000) ÷ 2 = $663,500

[QUESTION]
97. Broch Corporation’s income statement appears below:

Income Statement
Sales (all on account)................. $1,220,000
Cost of goods sold...................... 760,000
Gross margin.............................. 460,000
Operating expenses................... 415,692
 Net operating income................. 44,308
Interest expense......................... 14,000
Net income before taxes............ 30,308
Income taxes (35%)................... 10,608
Net income................................. $ 19,700

The company’s times interest earned ratio is closest to:

A) 4.87
B) 1.41
C) 3.16
D) 2.16
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $44,308 ÷ $14,000 = 3.16 (rounded)

[QUESTION]
98. Cutsinger Corporation has provided the following data from its most recent income statement:

Net operating income............ $55,000

Interest expense.................... $43,000
Net income before taxes........ $12,000
Income taxes......................... $4,000
Net income............................ $8,000

The times interest earned ratio is closest to:

A) 1.83
B) 0.28
C) 1.28
D) 0.19
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $55,000 ÷ $43,000 = 1.28

[QUESTION]
99. Karma Corporation has total assets of $190,000 and total liabilities of $90,000. The corporation's debt-to-
equity ratio is closest to:
A) 0.47
B) 0.90
C) 0.53
D) 0.32
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $90,000 ÷ $100,000* = 0.90
*Stockholders’ equity = Total assets – Total liabilities = $190,000 – $90,000 = $100,000

[QUESTION]
100. Rough Corporation’s total assets at the end of Year 2 were $1,247,000 and at the end of Year 1 were
$1,270,000. The company’s total liabilities at the end of Year 2 were $512,000 and at the end of Year 1 were
$550,000. The company’s total stockholders’ equity at the end of Year 2 was $735,000 and at the end of Year
1 was $720,000. The company’s equity multiplier is closest to:
A) 1.73
B) 1.44
C) 0.69
D) 0.58
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,258,500 ÷ $727,500 = 1.73 (rounded)
*Average total assets = ($1,247,000 + $1,270,000) ÷ 2 = $1,258,500
**Average stockholders' equity = ($735,000 + $720,000) ÷ 2 = $727,500

[QUESTION]
101. Younis Corporation’s income statement appears below:

Income Statement
Sales (all on account).............. $1,240,000
Cost of goods sold.................. 780,000
Gross margin........................... 460,000
Operating expenses................ 416,571
Net operating income.............. 43,429
Interest expense...................... 14,000
Net income before taxes......... 29,429
Income taxes (30%)................ 8,829
Net income.............................. $ 20,600

The company’s net profit margin percentage is closest to:

A) 37.1%
B) 3.5%
C) 2.4%
D) 1.7%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Net profit margin percentage = Net income ÷ Sales
= $20,600 ÷ $1,240,000 = 1.7% (rounded)

[QUESTION]
102. Crosswhite Corporation’s sales last year were $1,270,000, its gross margin was $400,000, its net
operating income was $53,769, and its net income was $26,500. The company’s net profit margin percentage
is closest to:
A) 31.5%
B) 3.2%
C) 4.2%
D) 2.1%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Net profit margin percentage = Net income ÷ Sales
= $26,500 ÷ $1,270,000 = 2.1% (rounded)

[QUESTION]
103. Mars Corporation has provided the following data for Year 2:

Sales.......................................... $1,330,000
Gross margin.............................. $500,000
Net operating income................. $79,692
Net income before taxes............ $63,692
Net income................................. $41,400

The company’s total stockholders’ equity at the end of Year 2 amounted to $1,095,000 and at the end of Year
1 to $1,060,000. The company’s return on equity for Year 2 is closest to:
A) 5.91%
B) 7.40%
C) 3.84%
D) 71.20%
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $41,400 ÷ $1,077,500 = 3.84% (rounded)
*Average stockholders' equity = ($1,095,000 + $1,060,000) ÷ 2 = $1,077,500

[QUESTION]
104. Sapien Corporation has provided the following data for the most recent year:

Sales.......................................... $1,340,000
Gross margin.............................. $460,000
Net operating income................. $54,846
Net income before taxes............ $41,846
Net income................................. $27,200

The company’s gross margin percentage is closest to:

A) 52.3%
B) 1691.2%
C) 5.9%
D) 34.3%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Gross margin percentage = Gross margin ÷ Sales
= $460,000 ÷ $1,340,000 = 34.3% (rounded)

[QUESTION]
105. Mormino Corporation’s income statement appears below:

Income Statement
Sales (all on account)................. $1,240,000
Cost of goods sold...................... 730,000
Gross margin.............................. 510,000
Operating expenses................... 450,462
Net operating income................. 59,538
Interest expense......................... 18,000
Net income before taxes............ 41,538
Income taxes (35%)................... 14,538
Net income................................. $ 27,000

The company’s gross margin percentage is closest to:

A) 1888.9%
B) 5.3%
C) 41.1%
D) 69.9%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Gross margin percentage = Gross margin ÷ Sales
= $510,000 ÷ $1,240,000 = 41.1% (rounded)

[QUESTION]
106. Jester Corporation's most recent income statement appears below:

Sales (all on account)............................ $610,000

Cost of goods sold................................. 340,000
Gross margin......................................... 270,000
Selling and administrative expense....... 160,000
Net operating income............................ 110,000
Interest expense.................................... 20,000
Net income before taxes........................ 90,000
Income taxes (30%)............................... 27,000
Net income............................................ $ 63,000

The beginning balance of total assets was $360,000 and the ending balance was $320,000. The return on
total assets is closest to:
A) 26.5%
B) 18.5%
C) 22.6%
D) 32.4%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $63,000 + [$20,000 × (1 – 0.30)] = $77,000
Average total assets = ($360,000 + $320,000) ÷ 2 = $340,000
Return on total assets = Adjusted net income ÷ Average total assets
= $77,000 ÷ $340,000 = 22.6% (rounded)

[QUESTION]
107. For Year 2, Etzkorn Corporation’s sales were $1,480,000, its gross margin was $580,000, its net
operating income was $63,714, its net income before taxes was $42,714, and its net income was $29,900.
The company’s total stockholders’ equity at the end of Year 2 amounted to $829,000 and at the end of Year 1
to $800,000. The company’s return on equity for Year 2 is closest to:
A) 3.67%
B) 60.16%
C) 5.24%
D) 7.82%
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $29,900 ÷ $814,500 = 3.67% (rounded)
*Average stockholders' equity = ($829,000 + $800,000) ÷ 2 = $814,500

[QUESTION]
108. Kienle Corporation’s Year 2 income statement appears below:

Income Statement
Sales.......................................... $1,280,000
Cost of goods sold...................... 800,000
Gross margin.............................. 480,000
Operating expenses................... 419,857
Net operating income................. 60,143
Interest expense......................... 12,000
Net income before taxes............ 48,143
Income taxes (30%)................... 14,443
Net income................................. $ 33,700

The company’s total assets at the end of Year 2 amounted to $1,359,000 and at the end of Year 1 to
$1,320,000. The company’s return on total assets for Year 2 is closest to:
A) 2.48%
B) 3.14%
C) 2.52%
D) 3.10%
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $42,100 ÷ $1,339,500 = 3.14% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $33,700 + [$12,000 × (1 – 0.30)] = $42,100
**Average total assets = ($1,359,000 + $1,320,000) ÷ 2 = $1,339,500

[QUESTION]
109. Valdovinos Corporation has provided the following data:

Sales (all on account).......... $1,150,000

Gross margin....................... $440,000
Net operating income........... $40,077
Net income before taxes...... $23,077
Net income........................... $15,000
The company’s net profit margin percentage is closest to:
A) 38.3%
B) 3.5%
C) 1.3%
D) 2.0%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Net profit margin percentage = Net income ÷ Sales
= $15,000 ÷ $1,150,000 = 1.3% (rounded)

[QUESTION]
110. Braverman Corporation's net income last year was $75,000 and its interest expense was $10,000. Total
assets at the beginning of the year were $650,000 and total assets at the end of the year were $610,000. The
corporation's income tax rate was 30%. The corporation's return on total assets for the year was closest to:
A) 13.5%
B) 12.4%
C) 13.0%
D) 11.9%
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Average total assets = ($650,000 + $610,000) ÷ 2 = $630,000
Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $75,000 + [$10,000 × (1 – 0.30)] = $82,000
Return on total assets = Adjusted net income ÷ Average total assets
= $82,000 ÷ $630,000 = 13.0%

[QUESTION]
111. Grosvenor Corporation's most recent income statement appears below:

Sales (all on account)............................ $807,000

Cost of goods sold................................. 446,000
Gross margin......................................... 361,000
Selling and administrative expense....... 186,000
Net operating income............................ 175,000
Interest expense.................................... 39,000
Net income before taxes........................ 136,000
Income taxes......................................... 40,000
Net income............................................ $ 96,000

The gross margin percentage is closest to:

A) 80.9%
B) 44.7%
C) 376.0%
D) 26.6%
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Gross margin percentage = Gross margin ÷ Sales
= $361,000 ÷ $807,000 = $44.7%

[QUESTION]
112. Fongeallaz Corporation’s income statement for Year 2 appears below:

Income Statement
Sales (all on account)................. $1,360,000
Cost of goods sold...................... 870,000
Gross margin.............................. 490,000
Operating expenses................... 416,286
Net operating income................. 73,714
Interest expense......................... 18,000
Net income before taxes............ 55,714
Income taxes (30%)................... 16,714
Net income................................. $ 39,000

The company’s total stockholders’ equity at the end of Year 2 amounted to $841,000 and at the end of Year 1
to $810,000. The company’s return on equity for Year 2 is closest to:
A) 64.40%
B) 8.93%
C) 6.75%
D) 4.72%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $39,000 ÷ $825,500 = 4.72% (rounded)
*Average stockholders' equity = ($841,000 + $810,000) ÷ 2 = $825,500

[QUESTION]
113. Weightman Corporation’s net operating income in Year 2 was $76,385, net income before taxes was
$55,385, and the net income was $36,000. Total common stock was $200,000 at the end of both Year 2 and
Year 1. The par value of common stock is $4 per share. The company’s total stockholders’ equity at the end
of Year 2 amounted to $983,000 and at the end of Year 1 to $950,000. The market price per share at the end
of Year 2 was $7.92. The company’s price-earnings ratio for Year 2 is closest to:
A) 7.14
B) 0.58
C) 5.18
D) 11.00
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $36,000 ÷ 50,000 shares = $0.72 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $200,000 ÷ $4 per share = 50,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $7.92 ÷ $0.72 = 11.00 (rounded)

[QUESTION]
114. The following information relates to Conejo Corporation for last year:

Book value per share........ $40

Par value per share.......... $12
Dividends per share.......... $5
Dividend payout ratio........ 20%
Dividend yield ratio........... 10%

What is Conejo's price-earnings ratio for last year?

A) 1.6
B) 2.4
C) 8.0
D) 2.0
Answer: D
Difficulty: 3 Hard
Learning Objective: 15-06
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Dividend yield ratio = Dividends per share ÷ Market price per share
0.10 = $5 per share ÷ Market price per share
Market price per share = $5 per share ÷ 0.10 = $50
Dividend payout ratio = Dividends per share ÷ Earnings per share
0.20 = $5 per share ÷ Earnings per share
Earnings per share = $5 per share ÷ 0.20 = $25
Price-earnings ratio = Market price per share ÷ Earnings per share
= $50 per share ÷ $25 per share = 2.0

[QUESTION]
115. Goldsmith Corporation has provided the following data:

Year 2 Year 1
 Common stock, $3 par value................... $270,000 $270,000
Retained earnings................................... $419,000 $400,000
Total stockholders' equity........................ $749,000 $730,000
Total liabilities & stockholders' equity...... $1,291,000 $1,270,000

The company’s net income in Year 2 was $24,400. The company’s book value per share at the end of Year 2
is closest to:
A) $8.32 per share
B) $4.66 per share
C) $14.34 per share
D) $0.27 per share
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $749,000 ÷ 90,000 shares = $8.32 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share =90,000 shares

[QUESTION]
116. Linzey Corporation has provided the following data:

Year 2 Year 1
Common stock, $2 par value................... $120,000 $120,000
Retained earnings................................... $747,000 $720,000
Total stockholders' equity........................ $927,000 $900,000

The company’s net income in Year 2 was $33,000. The company’s book value per share at the end of Year 2
is closest to:
A) $22.45 per share
B) $12.45 per share
C) $0.55 per share
D) $15.45 per share
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $927,000 ÷ 60,000 shares = $15.45 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $120,000 ÷ $2 per share = 60,000 shares

[QUESTION]
117. Tempel Corporation has provided the following data:
 Year 2 Year 1
Common stock, $4 par value...... $240,000 $240,000
Total stockholders' equity........... $817,000 $810,000
Net operating income................. $36,714
Net income before taxes............ $17,714
Net income................................. $12,400

The market price of common stock at the end of Year 2 was $2.77 per share. The company’s price-earnings
ratio for Year 2 is closest to:
A) 9.23
B) 0.35
C) 4.54
D) 13.40
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $12,400 ÷ 60,000 shares = $0.21 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $240,000 ÷ $4 per share = 60,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $2.77 ÷ $0.21 = 13.19 (rounded)

A more exact answer with less rounding error is 13.40.

[QUESTION]
118. Keyton Corporation’s net operating income in Year 2 was $43,714, net income before taxes was
$30,714, and the net income was $21,500. Total common stock was $200,000 at the end of both Year 2 and
Year 1. The par value of common stock is $4 per share. The company’s total stockholders’ equity at the end
of Year 2 amounted to $1,148,000 and at the end of Year 1 to $1,130,000. The company declared and paid
$3,500 dividends on common stock in Year 2. The market price per share was $8.43 at the end of Year 2.
The company’s dividend payout ratio for Year 2 is closest to:
A) 0.8%
B) 1.8%
C) 16.3%
D) 11.4%
Answer: C
Difficulty: 3 Hard
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $21,500 ÷ 50,000 shares = $0.43 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $200,000 ÷ $4 per share = 50,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.07 ÷ $0.43 = 16.3% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $3,500 ÷ 50,000 shares = $0.07 per share (rounded)

[QUESTION]
119. Rawdon Corporation’s net operating income in Year 2 was $52,429, net income before taxes was
$34,429, and the net income was $24,100. Total common stock was $360,000 at the end of both Year 2 and
Year 1. The par value of common stock is $4 per share. The company’s total stockholders’ equity at the end
of Year 2 amounted to $976,000 and at the end of Year 1 to $960,000. The company’s earnings per share for
Year 2 is closest to:
A) $0.58 per share
B) $0.38 per share
C) $0.27 per share
D) $5.84 per share
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $24,100 ÷ 90,000 shares = $0.27 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $360,000 ÷ $4 per share = 90,000 shares

[QUESTION]
120. Leflore Corporation has provided the following data:

Year 2 Year 1
Common stock, $5 par value...... $500,000 $500,000
Total stockholders' equity........... $1,016,000 $1,010,000
Net operating income................. $35,143
Net income before taxes............ $17,143
Net income................................. $12,000

Dividends on common stock during Year 2 totaled $6,000. The market price of common stock at the end of
Year 2 was $1.38 per share. The company’s dividend yield ratio for Year 2 is closest to:
A) 4.3%
B) 1.2%
C) 35.0%
D) 50.0%
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.06 ÷ $1.38 = 4.3% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $6,000 ÷ 100,000 shares = $0.06 per share (rounded)

[QUESTION]
121. Cameron Corporation had 50,000 shares of common stock issued and outstanding that it originally
issued for $40 per share. The following information pertains to these shares:

Book value at end of current year................ $70

Market value, beginning of current year....... $85
Market value, end of current year................ $90

The total dividend on common stock for the year was $400,000. Cameron Corporation's dividend yield ratio
for the year was:
A) 20.00%
B) 11.43%
C) 9.41%
D) 8.89%
Answer: D
Difficulty: 3 Hard
Learning Objective: 15-06
Topic Area:
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Dividend yield ratio = Dividends per share ÷ Market price per share
= ($400,000 ÷ 50,000 shares) ÷ $90 per share
= $8 per share ÷ $90 per share = 0.0889 (rounded)

[QUESTION]
122. Hernande Corporation has provided the following data:

Year 2 Year 1
Common stock, $4 par value............................... $400,000 $400,000
Net operating income........................................... $75,429
Net income before taxes...................................... $61,429
Net income........................................................... $43,000

The company’s earnings per share for Year 2 is closest to:

A) $4.25 per share
B) $0.43 per share
C) $0.61 per share
D) $0.75 per share
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $43,000 ÷ 100,000 shares = $0.43 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $400,000 ÷ $4 per share = 100,000 shares

[QUESTION]
123. Delfavero Corporation has provided the following data:

Year 2 Year 1
Common stock, $2 par value............................... $140,000 $140,000
Total stockholders' equity..................................... $953,000 930,000
Net operating income........................................... $55,462
Net income before taxes...................................... $36,462
Net income........................................................... $23,700

The company’s earnings per share for Year 2 is closest to:

A) $10.33 per share
B) $0.52 per share
C) $0.34 per share
D) $0.79 per share
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $23,700 ÷ 70,000 shares = $0.34 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares

[QUESTION]
124. Groeneweg Corporation has provided the following data:

Year 2 Year 1
Common stock, $2 par value............................... $100,000 $100,000
Total stockholders' equity..................................... $1,129,000 $1,100,000
Net operating income........................................... $61,538
Net income before taxes...................................... $51,538
Net income........................................................... $33,500

Dividends on common stock during Year 2 totaled $4,500. The market price of common stock at the end of
Year 2 was $9.45 per share. The company’s dividend payout ratio for Year 2 is closest to:
A) 8.7%
B) 13.4%
C) 4.5%
D) 1.0%
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $33,500 ÷ 50,000 shares = $0.67 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $100,000 ÷ $2 per share = 50,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.09 ÷ $0.67 = 13.4% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,500 ÷ 50,000 shares = $0.09 per share (rounded)

[QUESTION]
125. Spincic Corporation has provided the following data:

Year 2 Year 1
Common stock, $2 par value...... $200,000 $200,000
Net operating income................. $66,769
Net income before taxes............ $50,769
Net income................................. $33,000

The market price of common stock at the end of Year 2 was $4.13 per share. The company’s price-earnings
ratio for Year 2 is closest to:
A) 0.52
B) 8.10
C) 6.16
D) 12.52
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $33,000 ÷ 100,000 shares = $0.33 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $200,000 ÷ $2 per share = 100,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $4.13 ÷ $0.33 = 12.52 (rounded)

[QUESTION]
126. Kovack Corporation’s net operating income in Year 2 was $66,571, net income before taxes was
$46,571, and the net income was $32,600. Total common stock was $120,000 at the end of both Year 2 and
Year 1. The par value of common stock is $2 per share. The company’s total stockholders’ equity at the end
of Year 2 amounted to $962,000 and at the end of Year 1 to $930,000. The company declared and paid $600
dividends on common stock. The market price per share was $4.37. The company’s dividend yield ratio for
Year 2 is closest to:
A) 0.2%
B) 1.3%
C) 1.9%
D) 0.5%
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.01 ÷ $4.37 = 0.23% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $600 ÷ 60,000 shares = $0.01 per share (rounded)

[QUESTION]
127. Uhri Corporation has provided the following data:

Year 2 Year 1
Common stock, $4 par value............................... $320,000 $320,000
Net operating income........................................... $71,429
Net income before taxes...................................... $51,429
Net income........................................................... $36,000

Dividends on common stock during Year 2 totaled $4,000. The market price of common stock at the end of
Year 2 was $6.08 per share. The company’s dividend payout ratio for Year 2 is closest to:
A) 7.8%
B) 1.3%
C) 11.1%
D) 0.8%
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $36,000 ÷ 80,000 shares = $0.45 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $320,000 ÷ $4 per share = 80,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.05 ÷ $0.45 = 11.1% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,000 ÷ 80,000 shares = $0.05 per share (rounded)

[QUESTION]
128. Sabino Corporation’s total common stock was $500,000 at the end of both Year 2 and Year 1. The par
value of common stock is $5 per share. The company’s total stockholders’ equity at the end of Year 2
amounted to $1,125,000 and at the end of Year 1 to $1,090,000. The company’s total liabilities and
stockholders’ equity at the end of Year 2 amounted to $1,581,000 and at the end of Year 1 to $1,540,000.
The company’s retained earnings at the end of Year 2 amounted to $545,000 and at the end of Year 1 to
$510,000. The company’s net income in Year 2 was $39,000. The company’s book value per share at the end
of Year 2 is closest to:
A) $0.39 per share
B) $15.81 per share
C) $11.25 per share
D) $5.45 per share
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $1,125,000 ÷ 100,000 shares = $11.25 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares

Reference: CH15-Ref1
Nickolls Corporation has provided the following financial data:

Cash................................. $188,000
Accounts receivable, net .. $285,000
Total current assets.......... $709,000
Total current liabilities....... $167,000

[QUESTION]
129. The company’s working capital is:
A) $1,215,000
B) $542,000
C) $793,000
D) $709,000
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref1
Feedback:
Working capital = Current assets – Current liabilities
= $709,000 – $167,000 = $542,000

[QUESTION]
130. The company’s current ratio is closest to:
A) 0.47
B) 0.40
C) 0.19
D) 4.25
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref1
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $709,000 ÷ $167,000 = 4.25 (rounded)

[QUESTION]
131. The company’s acid-test (quick) ratio is closest to:
A) 2.47
B) 2.83
C) 3.10
D) 4.25
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref1
Feedback:
Acid-test (quick) ratio = Quick assets* ÷ Current liabilities
= $473,000 ÷ $167,000 = 2.83 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $188,000 + $0 + $285,000 = $473,000

Reference: CH15-Ref2
Macmillan Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 156,000 $ 120,000
Accounts receivable, net .................................. 268,000 280,000
Inventory........................................................... 146,000 130,000
Prepaid expenses............................................. 20,000 20,000
Total current assets.............................................. 590,000 550,000
Plant and equipment, net..................................... 732,000 760,000
Total assets.......................................................... $1,322,000 $1,310,000
 Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................. $ 175,000 $ 180,000
Accrued liabilities.............................................. 46,000 50,000
Notes payable, short term................................. 80,000 80,000
Total current liabilities.......................................... 301,000 310,000
Bonds payable..................................................... 190,000 190,000
Total liabilities...................................................... 491,000 500,000
Stockholders' equity:
Common stock, $5 par value............................ 450,000 450,000
Additional paid-in capital................................... 70,000 70,000
Retained earnings............................................. 311,000 290,000
Total stockholders' equity..................................... 831,000 810,000
Total liabilities & stockholders' equity................... $1,322,000 $1,310,000

Income Statement—Year 2
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,390,000

Cost of goods sold............................................... 830,000
Gross margin....................................................... 560,000
Operating expenses............................................. 500,615
Net operating income........................................... 59,385
Interest expense.................................................. 16,000
Net income before taxes...................................... 43,385
Income taxes (35%)............................................. 15,185
Net income........................................................... $ 28,200

Dividends on common stock during Year 2 totaled $7,200. The market price of common stock at the end of
Year 2 was $3.69 per share.

[QUESTION]
132. The company’s working capital at the end of Year 2 is:
A) $732,000
B) $831,000
C) $289,000
D) $590,000
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref2
Feedback:
Working capital = Current assets – Current liabilities
= $590,000 – $301,000 = $289,000

[QUESTION]
133. The company’s current ratio at the end of Year 2 is closest to:
A) 0.83
B) 1.96
C) 0.45
D) 0.37
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref2
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $590,000 ÷ $301,000 = 1.96 (rounded)

[QUESTION]
134. The company’s acid-test (quick) ratio at the end of Year 2 is closest to:
A) 1.96
B) 1.41
C) 1.20
D) 1.48
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref2
Feedback:
Acid-test (quick) ratio = Quick assets* ÷ Current liabilities
= $424,000 ÷ $301,000 = 1.41 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $156,000 + $0 + $268,000 = $424,000

Reference: CH15-Ref3
Mayfield Corporation has provided the following financial data:

Assets
Current assets:
Cash................................................................. $223,000
Accounts receivable, net .................................. 236,000
Inventory........................................................... 202,000
Prepaid expenses............................................. 10,000
Total current assets.............................................. 671,000
Plant and equipment, net..................................... 665,000
Total assets.......................................................... $1,336,000

Liabilities and Stockholders' Equity

Current liabilities:
 Accounts payable............................................. $156,000
Accrued liabilities.............................................. 52,000
Notes payable, short term................................. 45,000
Total current liabilities.......................................... 253,000
Bonds payable..................................................... 100,000
Total liabilities...................................................... 353,000
Stockholders' equity:
Common stock, $4 par value............................ 360,000
Additional paid-in capital................................... 80,000
Retained earnings............................................. 543,000
Total stockholders' equity..................................... 983,000
Total liabilities & stockholders' equity................... $1,336,000

[QUESTION]
135. The company’s working capital is:
A) $671,000
B) $665,000
C) $418,000
D) $983,000
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref3
Feedback:
Working capital = Current assets – Current liabilities
= $671,000 – $253,000 = $418,000

[QUESTION]
136. The company’s current ratio is closest to:
A) 0.26
B) 2.65
C) 0.50
D) 0.53
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref3
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $671,000 ÷ $253,000 = 2.65 (rounded)

[QUESTION]
137. The company’s acid-test (quick) ratio is closest to:
A) 1.90
B) 1.85
C) 2.65
D) 1.81
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref3
Feedback:
Acid-test (quick) ratio = Quick assets* ÷ Current liabilities
= $459,000 ÷ $253,000 = 1.81 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $223,000 + $0 + $236,000 = $459,000

Reference: CH15-Ref4
Excerpts from Colter Corporation's most recent balance sheet appear below:

Year 2 Year 1
Current assets:
Cash.................................... $ 90 $120
Accounts receivable, net..... 100 110
Inventory.............................. 170 160
Prepaid expenses................ 40 40
Total current assets................ $400 $430
Total current liabilities............. $320 $290

Sales on account in Year 2 amounted to $1,210 and the cost of goods sold was $720.

[QUESTION]
138. The working capital at the end of Year 2 is:
A) $850
B) $770
C) $400
D) $80
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref4
Feedback:
Working capital = Current assets – Current liabilities
= $400– $320 = $80

[QUESTION]
139. The current ratio at the end of Year 2 is closest to:
A) 0.32
B) 0.38
C) 1.25
D) 1.20
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref4
Feedback:
Current ratio = Current assets ÷ Current liabilities = $400 ÷ $320 = 1.25

[QUESTION]
140. The acid-test (quick) ratio at the end of Year 2 is closest to:
A) 0.72
B) 0.83
C) 0.59
D) 1.25
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref4
Feedback:
Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $90 + $0 + $100 = $190
Acid-test ratio = Quick assets ÷ Current liabilities = $190 ÷ $320 = 0.59 (rounded)

[QUESTION]
141. The accounts receivable turnover for Year 2 is closest to:
A) 1.10
B) 0.91
C) 11.52
D) 12.10
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref4
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $1,210 ÷ $105* = 11.52 (rounded)
*Average accounts receivable balance = ($100 + $110) ÷ 2 = $105

[QUESTION]
142. The inventory turnover for Year 2 is closest to:
A) 1.06
B) 0.94
C) 4.36
D) 4.24
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref4
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $720 ÷ $165* = 4.36 (rounded)
*Average inventory balance = ($170 + $160) ÷ 2 = $165

Reference: CH15-Ref5
Freiman Corporation's most recent balance sheet and income statement appear below:

Balance Sheet
December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 160 $ 120
Accounts receivable, net..................................... 220 240
Inventory............................................................. 120 130
Prepaid expenses............................................... 40 40
Total current assets................................................ 540 530
Plant and equipment, net........................................ 700 700
Total assets............................................................ $1,240 $1,230

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable................................................ $ 130 $ 150
Accrued liabilities................................................ 90 90
Notes payable, short term................................... 60 70
Total current liabilities............................................. 280 310
Bonds payable........................................................ 280 290
Total liabilities......................................................... 560 600
Stockholders’ equity:
Common stock, $2 par value............................... 100 100
Additional paid-in capital..................................... 200 200
Retained earnings............................................... 380 330
Total stockholders’ equity....................................... 680 630
Total liabilities & stockholders’ equity..................... $1,240 $1,230

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account)................................. $1,310
Cost of goods sold..................................... 780
 Gross margin.............................................. 530
Selling and administrative expense............ 359
Net operating income................................. 171
Interest expense......................................... 35
Net income before taxes............................ 136
Income taxes (30%)................................... 41
Net income................................................. $ 95

[QUESTION]
143. The working capital at the end of Year 2 is:
A) $260 thousand
B) $680 thousand
C) $700 thousand
D) $540 thousand
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Working capital = Current assets – Current liabilities
= $540 – $280 = $260

[QUESTION]
144. The current ratio at the end of Year 2 is closest to:
A) 0.45
B) 1.93
C) 0.44
D) 1.04
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Current ratio = Current assets ÷ Current liabilities
= $540 ÷ $280 = 1.93 (rounded)

[QUESTION]
145. The acid-test (quick) ratio at the end of Year 2 is closest to:
A) 0.96
B) 1.36
C) 1.50
D) 1.93
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Acid-test ratio = Quick assets* ÷ Current liabilities
= $380 ÷ $280 = 1.36 (rounded)
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $160 + $0 + $220 + $0 = $380

[QUESTION]
146. The accounts receivable turnover for Year 2 is closest to:
A) 5.95
B) 5.70
C) 1.09
D) 0.92
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*
= $1,310 ÷ $230 = 5.70 (rounded)
*Average accounts receivable balance = ($220 + $240) ÷ 2 = $230

[QUESTION]
147. The average collection period for Year 2 is closest to:
A) 64.0 days
B) 0.9 days
C) 61.3 days
D) 1.1 days
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*
= $1,310 ÷ $230 = 5.70 (rounded)
*Average accounts receivable balance = ($220 + $240) ÷ 2 = $230

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.70 = 64.0 days (rounded)

[QUESTION]
148. The inventory turnover for Year 2 is closest to:
A) 0.92
B) 6.50
C) 1.08
D) 6.24
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance*
= $780 ÷ $125 = 6.24
* Average inventory balance = ($120 + $130) ÷ 2 = $125

[QUESTION]
149. The average sale period for Year 2 is closest to:
A) 58.5 days
B) 33.4 days
C) 217.3 days
D) 56.2 days
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref5
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance*
= $780 ÷ $125 = 6.24
* Average inventory balance = ($120 + $130) ÷ 2 = $125

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 6.24 = 58.5 days (rounded)

Reference: CH15-Ref6
Data from Dunshee Corporation's most recent balance sheet appear below:

Year 2 Year 1
Current assets:
Cash.................................. $ 130 $100
Accounts receivable, net.... 270 290
Inventory............................ 90 110
Prepaid expenses.............. 10 10
Total current assets.............. $500 $510
Total current liabilities........... $230 $220

Sales on account in Year 2 amounted to $1,170 and the cost of goods sold was $730.
[QUESTION]
150. The working capital at the end of Year 2 is:
A) $270
B) $500
C) $770
D) $740
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref6
Feedback:
Working capital = Current assets – Current liabilities = $500 – $230 = $270

[QUESTION]
151. The current ratio at the end of Year 2 is closest to:
A) 0.38
B) 2.17
C) 0.94
D) 0.40
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref6
Feedback:
Current ratio = Current assets ÷ Current liabilities = $500 ÷ $230 = 2.17 (rounded)

[QUESTION]
152. The acid-test (quick) ratio at the end of Year 2 is closest to:
A) 2.17
B) 1.78
C) 1.74
D) 1.06
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref6
Feedback:
Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $130 + $0 + $270 = $400
Acid-test (quick) ratio = Quick assets ÷ Current liabilities
= $400 ÷ $230 = 1.74 (rounded)
[QUESTION]
153. The average collection period for Year 2 is closest to:
A) 1.1 days
B) 0.9 days
C) 84.3 days
D) 87.3 days
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref6
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $1,170 ÷ $280* = 4.18 (rounded)
*Average accounts receivable balance = ($270 + $290) ÷ 2 = $280
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 4.18 = 87.3 days (rounded)

[QUESTION]
154. The average sale period for Year 2 is closest to:
A) 28.1 days
B) 45.0 days
C) 50.0 days
D) 227.7 days
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref6
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $730 ÷ $100* = 7.30
*Average inventory balance = ($90 + $110) ÷ 2 = $100

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 7.30 = 50.0 days

Reference: CH15-Ref7
Financial statements for Maraby Corporation appear below:

Maraby Corporation
Balance Sheet
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
 Cash and marketable securities.......................... $ 220 $ 190
Accounts receivable, net..................................... 190 160
Inventory............................................................. 140 150
Prepaid expenses............................................... 70 80
Total current assets................................................ 620 580
Noncurrent assets:
Plant & equipment, net........................................ 1,180 1,150
Total assets............................................................ $1,800 $1,730

Current liabilities:
Accounts payable................................................ $ 100 $ 120
Accrued liabilities................................................ 100 70
Notes payable, short term................................... 160 160
Total current liabilities............................................. 360 350
Noncurrent liabilities:
Bonds payable.................................................... 450 500
Total liabilities......................................................... 810 850
Stockholders’ equity:
Common stock, $5 par........................................ 160 160
Additional paid-in capital..................................... 200 200
Retained earnings............................................... 630 520
Total stockholders’ equity....................................... 990 880
Total liabilities & stockholders’ equity..................... $1,800 $1,730

Maraby Corporation
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)................................. $1,960
Cost of goods sold..................................... 1,370
Gross margin.............................................. 590
Selling and administrative expense............ 230
Net operating income................................. 360
Interest expense......................................... 50
Net income before taxes............................ 310
Income taxes (30%)................................... 93
Net income................................................. $ 217

[QUESTION]
155. Maraby Corporation's working capital (in thousands of dollars) at the end of Year 2 was closest to:
A) $260
B) $620
C) $360
D) $990
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Working capital = Current assets – Current liabilities = $620 – $360 = $260
[QUESTION]
156. Maraby Corporation's current ratio at the end of Year 2 was closest to:
A) 1.34
B) 1.72
C) 0.60
D) 0.44
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Current ratio = Current assets ÷ Current liabilities = $620 ÷ $360 = 1.72 (rounded)

[QUESTION]
157. Maraby Corporation's acid-test (quick) ratio at the end of Year 2 was closest to:
A) 0.51
B) 0.47
C) 1.14
D) 1.95
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Acid-test ratio = Quick assets* ÷ Current liabilities = $410 ÷ $360 = 1.14 (rounded)
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $220 + $190 + $0 = $410

[QUESTION]
158. Maraby Corporation's accounts receivable turnover for Year 2 was closest to:
A) 13.5
B) 7.8
C) 11.2
D) 9.4
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $1,960 ÷ $175* = 11.2 (rounded)
*Average accounts receivable balance = ($190 + $160) ÷ 2 = $175

[QUESTION]
159. Maraby Corporation's average collection period for Year 2 was closest to:
A) 38.6 days
B) 46.6 days
C) 32.6 days
D) 27.0 days
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $1,960 ÷ $175* = 11.2 (rounded)
*Average accounts receivable balance = ($190 + $160) ÷ 2 = $175

Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 11.2 = 32.6 days (rounded)

[QUESTION]
160. Maraby Corporation's inventory turnover for Year 2 was closest to:
A) 11.2
B) 7.8
C) 9.4
D) 13.5
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,370 ÷ $145* = 9.4 (rounded)
*Average inventory balance = ($140 + $150) ÷ 2 = $145

[QUESTION]
161. Maraby Corporation's average sale period for Year 2 was closest to:
A) 38.8 days
B) 32.6 days
C) 46.6 days
D) 27.0 days
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref7
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance = $1,370 ÷ $145* = 9.4 (rounded)
*Average inventory balance = ($140 + $150) ÷ 2 = $145

Average sale period = 365 days ÷ Inventory turnover (see above) = 365 days ÷ 9.4 = 38.8 days (rounded)

Reference: CH15-Ref8
Excerpts from Sydner Corporation's most recent balance sheet appear below:

Year 2 Year 1
Current assets:......................
Cash.................................. $140 $160
Accounts receivable, net.... 210 230
Inventory............................ 240 200
Prepaid expenses.............. 10 10
Total current assets.............. $600 $600
Total current liabilities........... $360 $330

Sales on account in Year 2 amounted to $1,390 and the cost of goods sold was $900.

[QUESTION]
162. The working capital at the end of Year 2 is:
A) $600
B) $1,000
C) $880
D) $240
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Working capital = Current assets – Current liabilities = $600 – $360 = $240

[QUESTION]
163. The current ratio at the end of Year 2 is closest to:
A) 1.67
B) 0.32
C) 0.80
D) 0.41
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Current ratio = Current assets ÷ Current liabilities = $600 ÷ $360 = 1.67 (rounded)

[QUESTION]
164. The acid-test (quick) ratio at the end of Year 2 is closest to:
A) 1.67
B) 1.00
C) 0.97
D) 1.25
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $140 + $0 + $210 = $350
Acid-test (quick) ratio = Quick assets ÷ Current liabilities
= $350 ÷ $360 = 0.97 (rounded)

[QUESTION]
165. The accounts receivable turnover for Year 2 is closest to:
A) 6.62
B) 1.10
C) 6.32
D) 0.91
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $1,390 ÷ $220* = 6.32 (rounded)
*Average accounts receivable balance = ($210 + $230) ÷ 2 = $220

[QUESTION]
166. The average collection period for Year 2 is closest to:
A) 55.1 days
B) 0.9 days
C) 1.1 days
D) 57.8 days
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance
= $1,390 ÷ $220* = 6.32 (rounded)
*Average accounts receivable balance = ($210 + $230) ÷ 2 = $220

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 6.32 = 57.8 days (rounded)

[QUESTION]
167. The inventory turnover for Year 2 is closest to:
A) 3.75
B) 1.20
C) 4.09
D) 0.83
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $900 ÷ $220* = 4.09 (rounded)
*Average inventory balance = ($240 + $200) ÷ 2 = $220

[QUESTION]
168. The average sale period for Year 2 is closest to:
A) 63.0 days
B) 89.2 days
C) 236.3 days
D) 97.3 days
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref8
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory balance
= $900 ÷ $220* = 4.09 (rounded)
*Average inventory balance = ($240 + $200) ÷ 2 = $220

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 4.09 = 89.2 days
Reference: CH15-Ref9
Ribaudo Corporation has provided the following financial data from its balance sheet and income statement:

Year 2 Year 1
Cash........................................... $74,000 $130,000
Accounts receivable, net ........... $255,000 $240,000
Inventory.................................... $173,000 $180,000
Total current assets.................... $564,000 $610,000
Total assets................................ $1,350,000 $1,330,000
Accounts payable....................... $170,000 $160,000
Total liabilities............................. $633,000 $620,000
Total stockholders' equity........... $717,000 $710,000
Sales (all on account)................. $1,290,000
Cost of goods sold...................... $700,000

[QUESTION]
169. The company’s accounts receivable turnover for Year 2 is closest to:
A) 1.06
B) 5.06
C) 5.21
D) 0.94
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref9
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,290,000 ÷ $247,500 = 5.21 (rounded)
*Average accounts receivable =
($255,000 + $240,000) ÷ 2 = $247,500

[QUESTION]
170. The company’s average collection period for Year 2 is closest to:
A) 70.1 days
B) 1.1 days
C) 72.1 days
D) 1.0 days
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref9
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,290,000 ÷ $247,500 = 5.21 (rounded)
*Average accounts receivable =
($255,000 + $240,000) ÷ 2 = $247,500

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.21 = 70.1 days (rounded)

[QUESTION]
171. The company’s inventory turnover for Year 2 is closest to:
A) 3.89
B) 1.04
C) 3.97
D) 4.05
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref9
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $700,000 ÷ $176,500 = 3.97 (rounded)
*Average inventory =
($173,000 + $180,000) ÷ 2 = $176,500

[QUESTION]
172. The company’s average sale period for Year 2 is closest to:
A) 91.9 days
B) 48.9 days
C) 90.1 days
D) 198.1 days
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref9
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $700,000 ÷ $176,500 = 3.97 (rounded)
*Average inventory =
($173,000 + $180,000) ÷ 2 = $176,500
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 3.97 = 91.9 days (rounded)

[QUESTION]
173. The company’s operating cycle for Year 2 is closest to:
A) 95.9 days
B) 75.3 days
C) 162.0 days
D) 9.2 days
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref9
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $700,000 ÷ $176,500 = 3.97 (rounded)
*Average inventory =
($173,000 + $180,000) ÷ 2 = $176,500
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 3.97 = 91.9 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,290,000 ÷ $247,500 = 5.21 (rounded)
*Average accounts receivable =
($255,000 + $240,000) ÷ 2 = $247,500
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 5.21 = 70.1 days (rounded)

Operating cycle = Average sale period + Average collection period

= 91.9 days + 70.1 days = 162.0 days

[QUESTION]
174. The company’s total asset turnover for Year 2 is closest to:
A) 5.29
B) 0.19
C) 1.04
D) 0.96
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref9
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,290,000 ÷ $1,340,000 = 0.96 (rounded)
*Average total assets = ($1,350,000 + $1,330,000) ÷ 2 = $1,340,000

Reference: CH15-Ref10
Dahn Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
 Cash................................................................. $ 227,000 $ 150,000
Accounts receivable, net .................................. 134,000 130,000
Inventory........................................................... 150,000 130,000
Prepaid expenses............................................. 83,000 80,000
Total current assets.............................................. 594,000 490,000
Plant and equipment, net..................................... 769,000 840,000
Total assets.......................................................... $1,363,000 $1,330,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 200,000 $ 180,000
Accrued liabilities.............................................. 63,000 70,000
Notes payable, short term................................. 71,000 60,000
Total current liabilities.......................................... 334,000 310,000
Bonds payable..................................................... 290,000 290,000
Total liabilities...................................................... 624,000 600,000
Stockholders' equity:
Common stock, $5 par value............................ 400,000 400,000
Additional paid-in capital................................... 50,000 50,000
Retained earnings............................................. 289,000 280,000
Total stockholders' equity..................................... 739,000 730,000
Total liabilities & stockholders' equity................... $1,363,000 $1,330,000

Income Statement—Year 2
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,370,000

Cost of goods sold............................................... 850,000
Gross margin....................................................... 520,000
Operating expenses............................................. 482,692
Net operating income........................................... 37,308
Interest expense.................................................. 21,000
Net income before taxes...................................... 16,308
Income taxes (35%)............................................. 5,708
Net income........................................................... $ 10,600

Dividends on common stock during Year 2 totaled $1,600. The market price of common stock at the end of
Year 2 was $2.37 per share.

[QUESTION]
175. The company’s accounts receivable turnover for Year 2 is closest to:
A) 0.97
B) 10.38
C) 1.03
D) 10.22
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref10
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,370,000 ÷ $132,000 = 10.38 (rounded)
*Average accounts receivable =
($134,000 + $130,000) ÷ 2 = $132,000

[QUESTION]
176. The company’s average collection period for Year 2 is closest to:
A) 35.7 days
B) 1.1 days
C) 1.0 days
D) 35.2 days
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref10
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,370,000 ÷ $132,000 = 10.38 (rounded)
*Average accounts receivable =
($134,000 + $130,000) ÷ 2 = $132,000

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 10.38 = 35.2 days (rounded)

[QUESTION]
177. The company’s inventory turnover for Year 2 is closest to:
A) 6.54
B) 5.67
C) 6.07
D) 0.87
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref10
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $850,000 ÷ $140,000 = 6.07 (rounded)
*Average inventory =
($150,000 + $130,000) ÷ 2 = $140,000

[QUESTION]
178. The company’s average sale period for Year 2 is closest to:
A) 226.5 days
B) 60.1 days
C) 40.0 days
D) 64.4 days
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref10
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $850,000 ÷ $140,000 = 6.07 (rounded)
*Average inventory =
($150,000 + $130,000) ÷ 2 = $140,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 6.07 = 60.1 days (rounded)

[QUESTION]
179. The company’s operating cycle for Year 2 is closest to:
A) 66.2 days
B) 16.5 days
C) 95.3 days
D) 45.6 days
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref10
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $850,000 ÷ $140,000 = 6.07 (rounded)
*Average inventory =
($150,000 + $130,000) ÷ 2 = $140,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 6.07 = 60.1 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,370,000 ÷ $132,000 = 10.38 (rounded)
*Average accounts receivable =
($134,000 + $130,000) ÷ 2 = $132,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 10.38 = 35.2 days (rounded)

Operating cycle = Average sale period + Average collection period

= 60.1 days + 35.2 days = 95.3 days

[QUESTION]
180. The company’s total asset turnover for Year 2 is closest to:
A) 10.17
B) 0.10
C) 1.02
D) 0.98
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref10
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,370,000 ÷ $1,346,500 = 1.02 (rounded)
*Average total assets = ($1,363,000 + $1,330,000) ÷ 2 = $1,346,500

Reference: CH15-Ref11
Guttery Corporation has provided the following financial data from its balance sheet:

Year 2 Year 1
Accounts receivable, net ........... $112,000 $110,000
Inventory.................................... $174,000 $150,000
Total assets................................ $1,236,000 $1,250,000

Sales on account in Year 2 totaled $1,450,000 and cost of goods sold totaled $900,000.

[QUESTION]
181. The company’s accounts receivable turnover for Year 2 is closest to:
A) 12.95
B) 1.02
C) 0.98
D) 13.06
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref11
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,450,000 ÷ $111,000 = 13.06 (rounded)
*Average accounts receivable =
($112,000 + $110,000) ÷ 2 = $111,000

[QUESTION]
182. The company’s average collection period for Year 2 is closest to:
A) 1.1 days
B) 28.2 days
C) 1.0 days
D) 27.9 days
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref11
Feedback:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,450,000 ÷ $111,000 = 13.06 (rounded)
*Average accounts receivable =
($112,000 + $110,000) ÷ 2 = $111,000

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 13.06 = 27.9 days (rounded)

[QUESTION]
183. The company’s inventory turnover for Year 2 is closest to:
A) 5.17
B) 5.56
C) 6.00
D) 0.86
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref11
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $900,000 ÷ $162,000 = 5.56 (rounded)
*Average inventory =
($174,000 + $150,000) ÷ 2 = $162,000

[QUESTION]
184. The company’s average sale period for Year 2 is closest to:
A) 65.6 days
B) 226.6 days
C) 43.8 days
D) 70.6 days
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref11
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $900,000 ÷ $162,000 = 5.56 (rounded)
*Average inventory =
($174,000 + $150,000) ÷ 2 = $162,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 5.56 = 65.6 days (rounded)

[QUESTION]
185. The company’s operating cycle for Year 2 is closest to:
A) 71.2 days
B) 93.5 days
C) 18.6 days
D) 41.0 days
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref11
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $900,000 ÷ $162,000 = 5.56 (rounded)
*Average inventory =
($174,000 + $150,000) ÷ 2 = $162,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 5.56 = 65.6 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,450,000 ÷ $111,000 = 13.06 (rounded)
*Average accounts receivable =
($112,000 + $110,000) ÷ 2 = $111,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 13.06 = 27.9 days (rounded)

Operating cycle = Average sale period + Average collection period

= 65.6 days + 27.9 days = 93.5 days

[QUESTION]
186. The company’s total asset turnover for Year 2 is closest to:
A) 1.17
B) 11.04
C) 0.09
D) 0.85
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref11
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,450,000 ÷ $1,243,000 = 1.17 (rounded)
*Average total assets = ($1,236,000 + $1,250,000) ÷ 2 = $1,243,000

Reference: CH15-Ref12
Mahoe Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 105,000 $ 190,000
Accounts receivable, net .................................. 255,000 220,000
Inventory........................................................... 206,000 200,000
Prepaid expenses............................................. 44,000 50,000
Total current assets.............................................. 610,000 660,000
Plant and equipment, net..................................... 1,065,000 970,000
Total assets.......................................................... $1,675,000 $1,630,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 119,000 $ 110,000
Accrued liabilities.............................................. 88,000 80,000
Notes payable, short term................................. 53,000 50,000
Total current liabilities.......................................... 260,000 240,000
Bonds payable..................................................... 110,000 110,000
Total liabilities...................................................... 370,000 350,000
Stockholders' equity:
Common stock, $5 par value............................ 250,000 250,000
Additional paid-in capital................................... 70,000 70,000
Retained earnings............................................. 985,000 960,000
Total stockholders' equity..................................... 1,305,000 1,280,000
Total liabilities & stockholders' equity................... $1,675,000 $1,630,000

Income Statement—Year 2
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,330,000

Cost of goods sold............................................... 890,000
Gross margin....................................................... 440,000
Operating expenses............................................. 393,571
Net operating income........................................... 46,429
Interest expense.................................................. 10,000
Net income before taxes...................................... 36,429
Income taxes (30%)............................................. 10,929
Net income........................................................... $ 25,500

Dividends on common stock during Year 2 totaled $500. The market price of common stock at the end of
Year 2 was $8.06 per share.
[QUESTION]
187. The company’s operating cycle for Year 2 is closest to:
A) 70.8 days
B) 10.0 days
C) 87.7 days
D) 148.5 days
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref12
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $890,000 ÷ $203,000 = 4.38 (rounded)
*Average inventory =
($206,000 + $200,000) ÷ 2 = $203,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 4.38 = 83.3 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,330,000 ÷ $237,500 = 5.60 (rounded)
*Average accounts receivable =
($255,000 + $220,000) ÷ 2 = $237,500
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 5.60 = 65.2 days (rounded)

Operating cycle = Average sale period + Average collection period

= 83.3 days + 65.2 days = 148.5 days

[QUESTION]
188. The company’s total asset turnover for Year 2 is closest to:
A) 1.25
B) 0.80
C) 6.57
D) 0.15
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref12
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,330,000 ÷ $1,652,500 = 0.80 (rounded)
*Average total assets = ($1,675,000 + $1,630,000) ÷ 2 = $1,652,500

[QUESTION]
189. The company’s equity multiplier at the end of Year 2 is closest to:
A) 0.28
B) 1.28
C) 3.53
D) 0.78
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref12
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,652,500 ÷ $1,292,500 = 1.28 (rounded)
*Average total assets = ($1,675,000 + $1,630,000) ÷ 2 = $1,652,500
**Average stockholders' equity = ($1,305,000 + $1,280,000) ÷ 2 = $1,292,500

Reference: CH15-Ref13
Burdick Corporation has provided the following financial data from its balance sheet:

Year 2 Year 1
Accounts receivable, net ....... $266,000 $250,000
Inventory................................ $162,000 $190,000
Total assets............................ $1,415,000 $1,390,000
Total stockholders' equity....... $991,000 $970,000

Sales (all on account) in Year 2 amounted to $1,410,000 and the cost of goods sold was $860,000.

[QUESTION]
190. The company’s operating cycle for Year 2 is closest to:
A) 10.4 days
B) 79.5 days
C) 141.3 days
D) 72.2 days
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref13
Feedback:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $860,000 ÷ $176,000 = 4.89 (rounded)
*Average inventory =
($162,000 + $190,000) ÷ 2 = $176,000
Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 4.89 = 74.6 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,410,000 ÷ $258,000 = 5.47 (rounded)
*Average accounts receivable =
($266,000 + $250,000) ÷ 2 = $258,000
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 5.47 = 66.7 days (rounded)

Operating cycle = Average sale period + Average collection period

= 74.6 days + 66.7 days = 141.3 days

[QUESTION]
191. The company’s total asset turnover for Year 2 is closest to:
A) 0.99
B) 0.19
C) 5.32
D) 1.01
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref13
Feedback:
Total asset turnover = Sales ÷ Average total assets*
= $1,410,000 ÷ $1,402,500 = 1.01 (rounded)
*Average total assets = ($1,415,000 + $1,390,000) ÷ 2 = $1,402,500

[QUESTION]
192. The company’s equity multiplier at the end of Year 2 is closest to:
A) 0.70
B) 1.43
C) 2.34
D) 0.43
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref13
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,402,500 ÷ $980,500 = 1.43 (rounded)
*Average total assets = ($1,415,000 + $1,390,000) ÷ 2 = $1,402,500
**Average stockholders' equity = ($991,000 + $970,000) ÷ 2 = $980,500

Reference: CH15-Ref14
Financial statements for Narstad Corporation appear below:

Narstad Corporation
Balance Sheet
December 31, Year 2 and Year 1
 (dollars in thousands)

Current assets:
Cash and marketable securities.......................... $ 100 $ 100
Accounts receivable, net..................................... 220 190
Inventory............................................................. 190 180
Prepaid expenses............................................... 10 20
Total current assets................................................ 520 490
Plant & equipment, net........................................... 1,940 1,940
Total assets............................................................ $2,460 $2,430

Current liabilities:
Accounts payable................................................ $ 150 $ 150
Accrued liabilities................................................ 90 70
Notes payable, short term................................... 100 150
Total current liabilities............................................. 340 370
Bonds payable........................................................ 310 300
Total liabilities......................................................... 650 670
Stockholders’ equity:
Common stock, $2 par........................................ 180 180
Additional paid-in capital..................................... 330 330
Retained earnings............................................... 1,300 1,250
Total stockholders’ equity....................................... 1,810 1,760
Total liabilities & stockholders’ equity..................... $2,460 $2,430

Narstad Corporation
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)................................. $1,770
Cost of goods sold..................................... 1,230
Gross margin.............................................. 540
Selling and administrative expense............ 210
Net operating income................................. 330
Interest expense......................................... 30
Net income before taxes............................ 300
Income taxes (30%)................................... 90
Net income................................................. $ 210

[QUESTION]
193. Narstad Corporation's times interest earned ratio for Year 2 was closest to:
A) 11.0
B) 10.0
C) 18.0
D) 7.0
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref14
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $330 ÷ $30 = 11.0

[QUESTION]
194. Narstad Corporation's debt-to-equity ratio at the end of Year 2 was closest to:
A) 0.50
B) 0.36
C) 0.19
D) 0.17
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref14
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity = $650 ÷ $1,810 = 0.36 (rounded)

Reference: CH15-Ref15
Lasch Corporation has provided the following financial data from its balance sheet and income statement:

Year 2 Year 1
Total assets................................. $1,333,000 $1,320,000
Accounts payable........................ $158,000 $160,000
Accrued liabilities........................ $43,000 $40,000
Notes payable, short term........... $47,000 $50,000
Bonds payable............................ $250,000 $250,000
Total liabilities............................. $498,000 $500,000
Total stockholders' equity............ $835,000 $820,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)................. $1,250,000

Cost of goods sold...................... 840,000
Gross margin.............................. 410,000
Operating expenses.................... 366,286
Net operating income.................. 43,714
Interest expense......................... 18,000
Net income before taxes............. 25,714
Income taxes (30%).................... 7,714
Net income.................................. $ 18,000

[QUESTION]
195. The company’s times interest earned ratio for Year 2 is closest to:
A) 1.43
B) 3.47
C) 2.43
D) 1.00
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref15
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $43,714 ÷ $18,000 = 2.43 (rounded)

[QUESTION]
196. The company’s debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.30
B) 0.36
C) 0.41
D) 0.60
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref15
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $498,000 ÷ $835,000 = 0.60 (rounded)

[QUESTION]
197. The company’s equity multiplier at the end of Year 2 is closest to:
A) 1.60
B) 1.68
C) 0.63
D) 0.60
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref15
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,326,500 ÷ $827,500 = 1.60 (rounded)
*Average total assets = ($1,333,000 + $1,320,000) ÷ 2 = $1,326,500
**Average stockholders' equity = ($835,000 + $820,000) ÷ 2 = $827,500

Reference: CH15-Ref16
Deacon Corporation has provided the following financial data from its balance sheet and income statement:
 Year 2 Year 1
Total assets.......................................................................... $1,198,000 $1,160,000
Total liabilities....................................................................... $466,000 $460,000
Total stockholders' equity..................................................... $732,000 $700,000
Net operating income (income before interest and taxes).... $67,769
Interest expense................................................................... $13,000

[QUESTION]
198. The company’s times interest earned for Year 2 is closest to:
A) 2.74
B) 8.02
C) 5.21
D) 4.21
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref16
Feedback:
Times interest earned = Earnings before interest expense and income taxes
= $67,769 ÷ $13,000 = 5.21 (rounded)

[QUESTION]
199. The company’s debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.29
B) 0.38
C) 0.23
D) 0.64
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref16
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $466,000 ÷ $732,000 = 0.64 (rounded)

[QUESTION]
200. The company’s equity multiplier at the end of Year 2 is closest to:
A) 0.64
B) 1.65
C) 1.57
D) 0.61
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref16
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,179,000 ÷ $716,000 = 1.65 (rounded)
*Average total assets = ($1,198,000 + $1,160,000) ÷ 2 = $1,179,000
**Average stockholders' equity = ($732,000 + $700,000) ÷ 2 = $716,000

Reference: CH15-Ref17
Fayer Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 161,000 $ 180,000
Accounts receivable, net .................................. 110,000 130,000
Inventory........................................................... 181,000 160,000
Prepaid expenses............................................. 57,000 70,000
Total current assets.............................................. 509,000 540,000
Plant and equipment, net..................................... 1,044,000 960,000
Total assets.......................................................... $1,553,000 $1,500,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 188,000 $ 160,000
Accrued liabilities.............................................. 57,000 60,000
Notes payable, short term................................. 36,000 40,000
Total current liabilities.......................................... 281,000 260,000
Bonds payable..................................................... 200,000 200,000
Total liabilities...................................................... 481,000 460,000
Stockholders' equity:
Common stock, $4 par value............................ 200,000 200,000
Additional paid-in capital................................... 80,000 80,000
Retained earnings............................................. 792,000 760,000
Total stockholders' equity..................................... 1,072,000 1,040,000
Total liabilities & stockholders' equity................... $1,553,000 $1,500,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,220,000

Cost of goods sold............................................... 760,000
Gross margin....................................................... 460,000
Operating expenses............................................. 389,846
Net operating income........................................... 70,154
Interest expense.................................................. 14,000
 Net income before taxes...................................... 56,154
Income taxes (35%)............................................. 19,654
Net income........................................................... $ 36,500

Dividends on common stock during Year 2 totaled $4,500. The market price of common stock at the end of
Year 2 was $10.88 per share.

[QUESTION]
201. The company’s times interest earned ratio for Year 2 is closest to:
A) 7.71
B) 2.61
C) 5.01
D) 4.01
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref17
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $70,154 ÷ $14,000 = 5.01 (rounded)

[QUESTION]
202. The company’s debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.22
B) 0.27
C) 0.45
D) 0.19
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref17
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $481,000 ÷ $1,072,000 = 0.45 (rounded)

[QUESTION]
203. The company’s equity multiplier at the end of Year 2 is closest to:
A) 0.69
B) 2.23
C) 0.45
D) 1.45
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref17
Feedback:
Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,526,500 ÷ $1,056,000 = 1.45 (rounded)
*Average total assets = ($1,553,000 + $1,500,000) ÷ 2 = $1,526,500
**Average stockholders' equity = ($1,072,000 + $1,040,000) ÷ 2 = $1,056,000

Reference: CH15-Ref18
Tweedle Corporation's most recent balance sheet and income statement appear below:

Balance Sheet
December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2 Year 1
Assets
Current assets:
Cash.................................................................... $ 140 $ 130
Accounts receivable, net..................................... 200 210
Inventory............................................................. 150 180
Prepaid expenses............................................... 20 20
Total current assets................................................ 510 540
Plant and equipment, net........................................ 950 910
Total assets............................................................ $1,460 $1,450

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable................................................ $ 130 $ 150
Accrued liabilities................................................ 70 70
Notes payable, short term................................... 70 60
Total current liabilities............................................. 270 280
Bonds payable........................................................ 170 190
Total liabilities......................................................... 440 470
Stockholders’ equity:
Common stock, $1 par value............................... 200 200
Additional paid-in capital-.................................... 320 320
Retained earnings............................................... 500 460
Total stockholders’ equity....................................... 1,020 980
Total liabilities & stockholders’ equity..................... $1,460 $1,450

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account)................................. $1,190
Cost of goods sold..................................... 710
Gross margin.............................................. 480
Selling and administrative expense............ 226
Net operating income................................. 254
Interest expense......................................... 25
Net income before taxes............................ 229
Income taxes (30%)................................... 69
Net income................................................. $ 160
[QUESTION]
204. The times interest earned ratio for Year 2 is closest to:
A) 6.40
B) 9.16
C) 14.51
D) 10.16
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref18
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $254 ÷ $25 = 10.16

[QUESTION]
205. The debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.43
B) 0.24
C) 0.17
D) 0.54
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref18
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity = $440 ÷ $1.020 = 0.43 (rounded)

Reference: CH15-Ref19
Data from Lheureux Corporation's most recent balance sheet and the company's income statement appear
below:

Year 2 Year 1
Total assets............................. $1,440 $1,480
Total liabilities.......................... $400 $450
Total stockholders' equity........ $1,040 $1,030

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account)................................. $1,280
Cost of goods sold..................................... 850
Gross margin.............................................. 430
Selling and administrative expense............ 355
Net operating income................................. 75
 Interest expense......................................... 18
Net income before taxes............................ 57
Income taxes (30%)................................... 17
Net income................................................. $ 40

[QUESTION]
206. The times interest earned ratio for Year 2 is closest to:
A) 2.22
B) 4.17
C) 3.17
D) 5.95
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref19
Feedback:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $75 ÷ $18 = 4.17 (rounded)

[QUESTION]
207. The debt-to-equity ratio at the end of Year 2 is closest to:
A) 0.38
B) 0.13
C) 0.16
D) 0.43
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref19
Feedback:
Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity = $400 ÷ $1,040 = 0.38 (rounded)

Reference: CH15-Ref20
Neef Corporation has provided the following financial data from its balance sheet and income statement:

Year 2 Year 1
Total assets.......................................................... $1,302,000 $1,330,000
Total stockholders' equity..................................... $885,000 $880,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,420,000

Cost of goods sold............................................... 890,000
 Gross margin....................................................... 530,000
Operating expenses............................................. 493,000
Net operating income........................................... 37,000
Interest expense.................................................. 17,000
Net income before taxes...................................... 20,000
Income taxes (35%)............................................. 7,000
Net income........................................................... $ 13,000

[QUESTION]
208. The company’s net profit margin percentage for Year 2 is closest to:
A) 37.3%
B) 2.6%
C) 1.4%
D) 0.9%
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref20
Feedback:
Net profit margin percentage = Net income ÷ Sales
= $13,000 ÷ $1,420,000 = 0.9% (rounded)

[QUESTION]
209. The company’s gross margin percentage for Year 2 is closest to:
A) 59.6%
B) 2.5%
C) 37.3%
D) 4076.9%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref20
Feedback:
Gross margin percentage = Gross margin ÷ Sales
= $530,000 ÷ $1,420,000 = 37.3% (rounded)

[QUESTION]
210. The company’s return on total assets for Year 2 is closest to:
A) 0.99%
B) 1.00%
C) 1.85%
D) 1.83%
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref20
Feedback:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $24,050 ÷ $1,316,000 = 1.83% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $13,000 + [$17,000 × (1 – 0.35)] = $24,050
**Average total assets = ($1,302,000 + $1,330,000) ÷ 2 = $1,316,000

[QUESTION]
211. The company’s return on equity for Year 2 is closest to:
A) 67.25%
B) 2.27%
C) 1.47%
D) 4.19%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref20
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $13,000 ÷ $882,500 = 1.47% (rounded)
*Average stockholders' equity = ($885,000 + $880,000) ÷ 2 = $882,500

Reference: CH15-Ref21
Garrott Corporation’s total assets were $1,505,000 at the end of Year 2 and $1,520,000 at the end of Year 1.
Its total stockholders’ equity was $1,197,000 at the end of Year 2 and $1,180,000 at the end of Year 1.

Income Statement—Year 2
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,340,000

Cost of goods sold............................................... 830,000
Gross margin....................................................... 510,000
Operating expenses............................................. 465,143
Net operating income........................................... 44,857
Interest expense.................................................. 9,000
Net income before taxes...................................... 35,857
Income taxes (30%)............................................. 10,757
Net income........................................................... $ 25,100

[QUESTION]
212. The company’s net profit margin percentage for Year 2 is closest to:
A) 1.9%
B) 2.7%
C) 3.3%
D) 38.1%
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref21
Feedback:
Net profit margin percentage = Net income ÷ Sales
= $25,100 ÷ $1,340,000 = 1.9% (rounded)

[QUESTION]
213. The company’s gross margin percentage for Year 2 is closest to:
A) 4.9%
B) 61.4%
C) 38.1%
D) 2031.9%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref21
Feedback:
Gross margin percentage = Gross margin ÷ Sales
= $510,000 ÷ $1,340,000 = 38.1% (rounded)

[QUESTION]
214. The company’s return on total assets for Year 2 is closest to:
A) 2.09%
B) 2.08%
C) 1.67%
D) 1.66%
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref21
Feedback:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $31,400 ÷ $1,512,500 = 2.08% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $25,100 + [$9,000 × (1 – 0.30)] = $31,400
**Average total assets = ($1,505,000 + $1,520,000) ÷ 2 = $1,512,500
[QUESTION]
215. The company’s return on equity for Year 2 is closest to:
A) 3.02%
B) 3.77%
C) 2.11%
D) 79.14%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref21
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $25,100 ÷ $1,188,500 = 2.11% (rounded)
*Average stockholders' equity = ($1,197,000 + $1,180,000) ÷ 2 = $1,188,500

Reference: CH15-Ref22
Kearin Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 33,000 $ 100,000
Accounts receivable, net .................................. 281,000 250,000
Inventory........................................................... 122,000 130,000
Prepaid expenses............................................. 68,000 80,000
Total current assets.............................................. 504,000 560,000
Plant and equipment, net..................................... 1,016,000 980,000
Total assets.......................................................... $1,520,000 $1,540,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 80,000 $ 100,000
Accrued liabilities.............................................. 31,000 30,000
Notes payable, short term................................. 56,000 70,000
Total current liabilities.......................................... 167,000 200,000
Bonds payable..................................................... 260,000 260,000
Total liabilities...................................................... 427,000 460,000
Stockholders' equity:
Common stock, $5 par value............................ 500,000 500,000
Additional paid-in capital................................... 70,000 70,000
Retained earnings............................................. 523,000 510,000
Total stockholders' equity..................................... 1,093,000 1,080,000
Total liabilities & stockholders' equity................... $1,520,000 $1,540,000

Income Statement
 For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,300,000

Cost of goods sold............................................... 800,000
Gross margin....................................................... 500,000
Operating expenses............................................. 448,692
Net operating income........................................... 51,308
Interest expense.................................................. 19,000
Net income before taxes...................................... 32,308
Income taxes (35%)............................................. 11,308
Net income........................................................... $ 21,000

Dividends on common stock during Year 2 totaled $8,000. The market price of common stock at the end of
Year 2 was $2.02 per share.

[QUESTION]
216. The company’s net profit margin percentage for Year 2 is closest to:
A) 3.9%
B) 38.5%
C) 2.5%
D) 1.6%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref22
Feedback:
Net profit margin percentage = Net income ÷ Sales
= $21,000 ÷ $1,300,000 = 1.6% (rounded)

[QUESTION]
217. The company’s gross margin percentage for Year 2 is closest to:
A) 62.5%
B) 4.2%
C) 38.5%
D) 2381.0%
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref22
Feedback:
Gross margin percentage = Gross margin ÷ Sales
= $500,000 ÷ $1,300,000 = 38.5% (rounded)

[QUESTION]
218. The company’s return on total assets for Year 2 is closest to:
A) 1.38%
B) 2.18%
C) 1.37%
D) 2.19%
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref22
Feedback:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $33,350 ÷ $1,530,000 = 2.18% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $21,000 + [$19,000 × (1 – 0.35)] = $33,350
**Average total assets = ($1,520,000 + $1,540,000) ÷ 2 = $1,530,000

[QUESTION]
219. The company’s return on equity for Year 2 is closest to:
A) 71.44%
B) 4.72%
C) 2.97%
D) 1.93%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref22
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $21,000 ÷ $1,086,500 = 1.93% (rounded)
*Average stockholders' equity = ($1,093,000 + $1,080,000) ÷ 2 = $1,086,500

Reference: CH15-Ref23
Doonan Corporation has provided the following financial data from its balance sheet and income statement:

Year 2 Year 1
Total assets.......................................................... $1,489,000 $1,440,000
Stockholders' equity:
Common stock, $4 par value............................ $360,000 $360,000
Additional paid-in capital................................... $70,000 $70,000
Retained earnings............................................. $570,000 $550,000
Total stockholders' equity..................................... $1,000,000 $980,000
Interest expense.................................................. $15,000
Income taxes (35%)............................................. $14,162
Net income........................................................... $26,300
The market price of common stock at the end of Year 2 was $4.79 per share.

[QUESTION]
220. The company’s return on total assets for Year 2 is closest to:
A) 1.77%
B) 2.46%
C) 1.80%
D) 2.42%
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref23
Feedback:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $36,050 ÷ $1,464,500 = 2.46% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $26,300 + [$15,000 × (1 – 0.35)] = $36,050
**Average total assets = ($1,489,000 + $1,440,000) ÷ 2 = $1,464,500

[QUESTION]
221. The company’s return on equity for Year 2 is closest to:
A) 5.60%
B) 4.09%
C) 2.66%
D) 68.28%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref23
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $26,300 ÷ $990,000 = 2.66% (rounded)
*Average stockholders' equity = ($1,000,000 + $980,000) ÷ 2 = $990,000

[QUESTION]
222. The company’s earnings per share for Year 2 is closest to:
A) $6.33 per share
B) $0.29 per share
C) $0.45 per share
D) $0.62 per share
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref23
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $26,300 ÷ 90,000 shares = $0.29 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $360,000 ÷ $4 per share = 90,000 shares

[QUESTION]
223. The company’s price-earnings ratio for Year 2 is closest to:
A) 0.76
B) 10.64
C) 16.52
D) 7.73
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref23
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $26,300 ÷ 90,000 shares = $0.29 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $360,000 ÷ $4 per share = 90,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $4.79 ÷ $0.29 = 16.52 (rounded)

Reference: CH15-Ref24
Settles Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 142,000 $ 110,000
Accounts receivable, net .................................. 104,000 120,000
Inventory........................................................... 119,000 120,000
Prepaid expenses............................................. 37,000 40,000
Total current assets.............................................. 402,000 390,000
Plant and equipment, net..................................... 717,000 720,000
Total assets.......................................................... $1,119,00 $1,110,00
0 0

Liabilities and Stockholders' Equity

Current liabilities:
 Accounts payable............................................. $ 156,000 $ 180,000
Accrued liabilities.............................................. 84,000 70,000
Notes payable, short term................................. 66,000 60,000
Total current liabilities.......................................... 306,000 310,000
Bonds payable..................................................... 250,000 250,000
Total liabilities...................................................... 556,000 560,000
Stockholders' equity:
Common stock, $4 par value............................ 240,000 240,000
Additional paid-in capital................................... 90,000 90,000
Retained earnings............................................. 233,000 220,000
Total stockholders' equity..................................... 563,000 550,000
Total liabilities & stockholders' equity................... $1,119,00 $1,110,00
0 0

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,360,00

0
Cost of goods sold............................................... 850,000
Gross margin....................................................... 510,000
Operating expenses............................................. 462,692
Net operating income........................................... 47,308
Interest expense.................................................. 19,000
Net income before taxes...................................... 28,308
Income taxes (35%)............................................. 9,908
Net income........................................................... $ 18,400

Dividends on common stock during Year 2 totaled $5,400. The market price of common stock at the end of
Year 2 was $5.89 per share.

[QUESTION]
224. The company’s return on total assets for Year 2 is closest to:
A) 2.75%
B) 1.64%
C) 1.65%
D) 2.76%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref24
Feedback:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $30,750 ÷ $1,114,500 = 2.76% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $18,400 + [$19,000 × (1 – 0.35)] = $30,750
**Average total assets = ($1,119,000 + $1,110,000) ÷ 2 = $1,114,500
[QUESTION]
225. The company’s return on equity for Year 2 is closest to:
A) 3.31%
B) 8.50%
C) 5.09%
D) 50.52%
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref24
Feedback:
Return on equity = Net income ÷ Average stockholders' equity*
= $18,400 ÷ $556,500 = 3.31% (rounded)
*Average stockholders' equity = ($563,000 + $550,000) ÷ 2 = $556,500

[QUESTION]
226. The company’s earnings per share for Year 2 is closest to:
A) $0.31 per share
B) $0.47 per share
C) $0.79 per share
D) $3.88 per share
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref24
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $18,400 ÷ 60,000 shares = $0.31 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $240,000 ÷ $4 per share = 60,000 shares

[QUESTION]
227. The company’s price-earnings ratio for Year 2 is closest to:
A) 19.00
B) 12.53
C) 7.46
D) 1.52
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref24
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $18,400 ÷ 60,000 shares = $0.31 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $240,000 ÷ $4 per share = 60,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $5.89 ÷ $0.31 = 19.00 (rounded)

Reference: CH15-Ref25
Recher Corporation’s common stock has a par value of $3 per share and has been stable at a total value of
$270,000 on the company’s balance sheet for several years. The total stockholders’ equity at the end of this
year was $1,023,000 and at the beginning of the year was $1,010,000. Net income for the year was $17,500.
Dividends on common stock during the year totaled $4,500. The market price of common stock at the end of
the year was $3.76 per share.

[QUESTION]
228. The company’s earnings per share is closest to:
A) $7.37 per share
B) $0.45 per share
C) $0.30 per share
D) $0.19 per share
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref25
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $17,500 ÷ 90,000 shares = $0.19 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share = 90,000 shares

[QUESTION]
229. The company’s price-earnings ratio is closest to:
A) 19.79
B) 0.51
C) 8.36
D) 12.53
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref25
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $17,500 ÷ 90,000 shares = $0.19 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share = 90,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $3.76 ÷ $0.19 = 19.79 (rounded)

[QUESTION]
230. The company’s dividend payout ratio is closest to:
A) 1.3%
B) 1.7%
C) 17.1%
D) 26.3%
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref25
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $17,500 ÷ 90,000 shares = $0.19 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share = 90,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.05 ÷ $0.19 = 26.3% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,500 ÷ 90,000 shares = $0.05 per share (rounded)

[QUESTION]
231. The company’s dividend yield ratio is closest to:
A) 1.7%
B) 17.1%
C) 1.3%
D) 26.3%
Answer: C
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref25
Feedback:
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.05 ÷ $3.76 = 1.33% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,500 ÷ 90,000 shares = $0.05 per share (rounded)

[QUESTION]
232. The company’s book value per share at the end of the year is closest to:
A) $11.37 per share
B) $7.37 per share
C) $0.19 per share
D) $16.81 per share
Answer: A
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref25
Feedback:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $1,023,000 ÷ 90,000 shares = $11.37 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share =90,000 shares

Reference: CH15-Ref26
Sperle Corporation has provided the following data concerning its stockholders’ equity accounts:

Year 2 Year 1
Stockholders' equity:
Common stock, $5 par value............................ $400,000 $400,000
Additional paid-in capital................................... 60,000 60,000
Retained earnings............................................. 654,000 630,000
Total stockholders' equity..................................... $1,114,000 $1,090,000

Net income for Year 2 was $30,400. Dividends on common stock during Year 2 totaled $6,400. The market
price of common stock at the end of Year 2 was $3.08 per share.

[QUESTION]
233. The company’s earnings per share for Year 2 is closest to:
A) $8.18 per share
B) $0.38 per share
C) $0.54 per share
D) $0.68 per share
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref26
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $30,400 ÷ 80,000 shares = $0.38 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $400,000 ÷ $5 per share = 80,000 shares

[QUESTION]
234. The company’s price-earnings ratio for Year 2 is closest to:
A) 0.38
B) 4.53
C) 5.70
D) 8.11
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref26
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $30,400 ÷ 80,000 shares = $0.38 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $400,000 ÷ $5 per share = 80,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $3.08 ÷ $0.38 = 8.11 (rounded)

[QUESTION]
235. The company’s dividend payout ratio for Year 2 is closest to:
A) 1.6%
B) 21.1%
C) 2.6%
D) 14.7%
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref26
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $30,400 ÷ 80,000 shares = $0.38 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $400,000 ÷ $5 per share = 80,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.08 ÷ $0.38 = 21.1% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $6,400 ÷ 80,000 shares = $0.08 per share (rounded)

[QUESTION]
236. The company’s dividend yield ratio for Year 2 is closest to:
A) 21.1%
B) 2.6%
C) 1.6%
D) 14.7%
Answer: B
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref26
Feedback:
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.08 ÷ $3.08 = 2.60% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $6,400 ÷ 80,000 shares = $0.08 per share (rounded)

[QUESTION]
237. The company’s book value per share at the end of Year 2 is closest to:
A) $0.38 per share
B) $8.18 per share
C) $18.08 per share
D) $13.93 per share
Answer: D
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref26
Feedback:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $1,114,000 ÷ 80,000 shares = $13.93 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $400,000 ÷ $5 per share = 80,000 shares

Reference: CH15-Ref27
Symons Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 225,000 $ 160,000
Accounts receivable, net .................................. 191,000 180,000
Inventory........................................................... 96,000 110,000
Prepaid expenses............................................. 91,000 80,000
Total current assets.............................................. 603,000 530,000
Plant and equipment, net..................................... 810,000 840,000
Total assets.......................................................... $1,413,00 $1,370,00
0 0

Liabilities and Stockholders' Equity

Current liabilities:
 Accounts payable............................................. $ 226,000 $ 190,000
Accrued liabilities.............................................. 66,000 70,000
Notes payable, short term................................. 54,000 50,000
Total current liabilities.......................................... 346,000 310,000
Bonds payable..................................................... 170,000 170,000
Total liabilities...................................................... 516,000 480,000
Stockholders' equity:
Common stock, $5 par value............................ 250,000 250,000
Additional paid-in capital................................... 70,000 70,000
Retained earnings............................................. 577,000 570,000
Total stockholders' equity..................................... 897,000 890,000
Total liabilities & stockholders' equity................... $1,413,00 $1,370,00
0 0

Income Statement—Year 2
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,260,00

0
Cost of goods sold............................................... 760,000
Gross margin....................................................... 500,000
Operating expenses............................................. 473,429
Net operating income........................................... 26,571
Interest expense.................................................. 13,000
Net income before taxes...................................... 13,571
Income taxes (30%)............................................. 4,071
Net income........................................................... $ 9,500

Dividends on common stock during Year 2 totaled $2,500. The market price of common stock at the end of
Year 2 was $2.01 per share.

[QUESTION]
238. The company’s earnings per share for Year 2 is closest to:
A) $0.53 per share
B) $11.54 per share
C) $0.19 per share
D) $0.27 per share
Answer: C
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref27
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $9,500 ÷ 50,000 shares = $0.19 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $250,000 ÷ $5 per share = 50,000 shares

[QUESTION]
239. The company’s price-earnings ratio for Year 2 is closest to:
A) 3.79
B) 10.58
C) 0.17
D) 7.44
Answer: B
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref27
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $9,500 ÷ 50,000 shares = $0.19 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $250,000 ÷ $5 per share = 50,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $2.01 ÷ $0.19 = 10.58 (rounded)

[QUESTION]
240. The company’s dividend payout ratio for Year 2 is closest to:
A) 26.3%
B) 2.5%
C) 18.4%
D) 1.0%
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref27
Feedback:
Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $9,500 ÷ 50,000 shares = $0.19 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $250,000 ÷ $5 per share = 50,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.05 ÷ $0.19 = 26.3% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,500 ÷ 50,000 shares = $0.05 per share (rounded)

[QUESTION]
241. The company’s dividend yield ratio for Year 2 is closest to:
A) 1.0%
B) 18.4%
C) 26.3%
D) 2.5%
Answer: D
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref27
Feedback:
Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.05 ÷ $2.01 = 2.49% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,500 ÷ 50,000 shares = $0.05 per share (rounded)

[QUESTION]
242. The company’s book value per share at the end of Year 2 is closest to:
A) $17.94 per share
B) $28.26 per share
C) $0.19 per share
D) $11.54 per share
Answer: A
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Refer To: CH15-Ref27
Feedback:
Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $897,000 ÷ 50,000 shares = $17.94 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $250,000 ÷ $5 per share = 50,000 shares

Essay

[QUESTION]
243. Rubendall Corporation's total current assets are $310,000, its noncurrent assets are $630,000, its total
current liabilities are $250,000, its long-term liabilities are $300,000, and its stockholders' equity is $390,000.

Required:
Compute the company's current ratio. Show your work!
Answer:
Current ratio = Current assets ÷ Current liabilities
= $310,000 ÷ $250,000 = 1.24
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
244. Gremel Corporation has provided the following financial data:
 Current assets:
Cash....................................... $241,000
Accounts receivable, net ........ $234,000
Inventory................................. $119,000
Prepaid expenses................... $45,000
Total current assets.................... $639,000
Current liabilities:
Accounts payable.................... $163,000
Accrued liabilities.................... $87,000
Notes payable, short term....... $57,000
Total current liabilities................. $307,000

Required:
a. What is the company’s working capital?
b. What is the company’s current ratio?
c. What is the company’s acid-test (quick) ratio?
Answer:
a. Working capital = Current assets – Current liabilities
= $639,000 – $307,000 = $332,000

b. Current ratio = Current assets ÷ Current liabilities

= $639,000 ÷ $307,000 = 2.08 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $475,000 ÷ $307,000 = 1.55 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $241,000 + $0 + $234,000 = $475,000
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
245. Steinkraus Corporation has provided the following data:

This Year Last Year

Accounts receivable, net. . $104,000 $115,000
Inventory.......................... $195,000 $174,000
Sales on account............. $886,000
Cost of goods sold........... $622,000

Required:
Compute the accounts receivable turnover for this year. Show your work!
Answer:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $886,000 ÷ $109,500 = 8.09
*Average accounts receivable = ($104,000 + $115,000) ÷ 2 = $109,500
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
246. Arkin Corporation's total current assets are $290,000, its noncurrent assets are $520,000, its total
current liabilities are $210,000, its long-term liabilities are $420,000, and its stockholders' equity is $180,000.

Required:
Compute the company's working capital. Show your work!
Answer:
Working capital = Current assets – Current liabilities
= $290,000 – $210,000 = $80,000
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
247. Wowk Corporation has provided the following financial data:

Assets
Current assets:
Cash................................................................. $ 133,000
Accounts receivable, net .................................. 157,000
Inventory........................................................... 215,000
Prepaid expenses............................................. 24,000
Total current assets.............................................. 529,000
Plant and equipment, net..................................... 768,000
Total assets.......................................................... $1,297,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 95,000
Accrued liabilities.............................................. 18,000
Notes payable, short term................................. 90,000
Total current liabilities.......................................... 203,000
Bonds payable..................................................... 110,000
Total liabilities...................................................... 313,000
Stockholders' equity:
Common stock, $4 par value............................ 200,000
Additional paid-in capital................................... 80,000
Retained earnings............................................. 704,000
Total stockholders' equity..................................... 984,000
Total liabilities & stockholders' equity................... $1,297,000

Required:
a. What is the company’s working capital?
b. What is the company’s current ratio?
c. What is the company’s acid-test (quick) ratio?
Answer:
a. Working capital = Current assets – Current liabilities
= $529,000 – $203,000 = $326,000

b. Current ratio = Current assets ÷ Current liabilities

= $529,000 ÷ $203,000 = 2.61 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $290,000 ÷ $203,000 = 1.43 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $133,000 + $0 + $157,000 = $290,000
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
248. Data from Yochem Corporation's most recent balance sheet appear below:

Cash................................... $16,000
Marketable securities......... $24,000
Accounts receivable, net.... $39,000
Inventory............................ $53,000
Prepaid expenses.............. $11,000
Current liabilities................. $109,000

Required:
Compute the company's acid-test (quick) ratio. Show your work!
Answer:
Acid-test ratio = Quick assets* ÷ Current liabilities
= $79,000 ÷ $109,000 = 0.72
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $16,000 + $24,000 + $39,000 = $79,000
Difficulty: 1 Easy
Learning Objective: 15-02
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
249. Excerpts from Candle Corporation's most recent balance sheet (in thousands of dollars) appear below:

Year 2 Year 1
Current assets:
Cash........................................ $160 $100
Accounts receivable, net......... 190 190
Inventory................................. 140 130
Prepaid expenses.................... 90 90
 Total current assets.................... $580 $510
Current liabilities:
Accounts payable.................... $200 $180
Accrued liabilities..................... 30 30
Notes payable, short term....... 90 80
Total current liabilities................. $320 $290

Sales on account during the year totaled $1,200 thousand. Cost of goods sold was $800 thousand.

Required:
Compute the following for Year 2:
a. Working capital.
b. Current ratio.
c. Acid-test (quick) ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
Answer:
a. Working capital = Current assets – Current liabilities
= $580 – $320 = $260

b. Current ratio = Current assets ÷ Current liabilities

= $580 ÷ $320 = 1.81

c. Acid-test ratio = Quick assets* ÷ Current liabilities

= $350 ÷ $320 = 1.09
*Quick assets
= Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $160 + $0 + $190 = $350

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,200 ÷ $190 = 6.32
*Average accounts receivable = ($190 + $190) ÷ 2 = $190

e. Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 6.32 = 57.8 days

f. Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $800 ÷ $135 = 5.93
*Average inventory balance = ($140 + $130) ÷ 2 = $135

g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 5.93 = 61.6 days
Difficulty: 1 Easy
Learning Objective: 15-02
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
250. Wegener Corporation's most recent balance sheet and income statement appear below:
 Balance Sheet
December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash.................................................................... $ 90 $ 110
Accounts receivable, net..................................... 220 270
Inventory............................................................. 130 150
Prepaid expenses............................................... 70 80
Total current assets................................................ 510 610
Plant and equipment, net........................................ 1,000 920
Total assets............................................................ $1,510 $1,530

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable................................................ $ 90 $ 110
Accrued liabilities................................................ 60 60
Notes payable, short term................................... 50 60
Total current liabilities............................................. 200 230
Bonds payable........................................................ 130 140
Total liabilities......................................................... 330 370
Stockholders’ equity:
Common stock, $1 par value............................... 400 400
Additional paid-in capital..................................... 240 240
Retained earnings............................................... 540 520
Total stockholders’ equity....................................... 1,180 1,160
Total liabilities & stockholders’ equity..................... $1,510 $1,530

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account)................................. $1,400
Cost of goods sold..................................... 860
Gross margin.............................................. 540
Selling and administrative expense............ 450
Net operating income................................. 90
Interest expense......................................... 19
Net income before taxes............................ 71
Income taxes (30%)................................... 21
Net income................................................. $ 50

Required:
Compute the following for Year 2:
a. Working capital.
b. Current ratio.
c. Acid-test (quick) ratio.
d. Accounts receivable turnover.
e. Average collection period.
f. Inventory turnover.
g. Average sale period.
Answer:
a. Working capital = Current assets – Current liabilities
= $510 – $200 = $310

b. Current ratio = Current assets ÷ Current liabilities

= $510 ÷ $200 = 2.55

c. Acid-test ratio = Quick assets* ÷ Current liabilities

= $310 ÷ $200 = 1.55
*Quick assets
= Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $90 + $0 + $220 = $310

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,400 ÷ $245 = 5.71
*Average accounts receivable = ($220 + $270) ÷ 2 = $245

e. Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 5.71 = 63.9 days

f. Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $860 ÷ $140 = 6.14
*Average inventory balance = ($130 + $150) ÷ 2 = $140

g. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 6.14 = 59.4 days
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
251. Abdool Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 190,000 $ 190,000
Accounts receivable, net .................................. 197,000 200,000
Inventory........................................................... 232,000 200,000
Prepaid expenses............................................. 9,000 10,000
Total current assets.............................................. 628,000 600,000
Plant and equipment, net..................................... 695,000 700,000
Total assets.......................................................... $1,323,000 $1,300,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 206,000 $ 200,000
Accrued liabilities.............................................. 104,000 90,000
Notes payable, short term................................. 41,000 50,000
Total current liabilities.......................................... 351,000 340,000
Bonds payable..................................................... 130,000 130,000
 Total liabilities...................................................... 481,000 470,000
Stockholders' equity:
Common stock, $2 par value............................ 160,000 160,000
Additional paid-in capital................................... 70,000 70,000
Retained earnings............................................. 612,000 600,000
Total stockholders' equity..................................... 842,000 830,000
Total liabilities & stockholders' equity................... $1,323,000 $1,300,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,330,000

Cost of goods sold............................................... 740,000
Gross margin....................................................... 590,000
Operating expenses............................................. 555,000
Net operating income........................................... 35,000
Interest expense.................................................. 11,000
Net income before taxes...................................... 24,000
Income taxes (30%)............................................. 7,200
Net income........................................................... $ 16,800

Required:
a. What is the company’s working capital at the end of Year 2?
b. What is the company’s current ratio at the end of Year 2?
c. What is the company’s acid-test (quick) ratio at the end of Year 2?
d. What is the company’s accounts receivable turnover for Year 2?
e. What is the company’s average collection period for Year 2?
f. What is the company’s inventory turnover for Year 2?
g. What is the company’s average sale period for Year 2?
h. What is the company’s operating cycle for Year 2?
i. What is the company’s total asset turnover for Year 2?
Answer:
a. Working capital = Current assets – Current liabilities
= $628,000 – $351,000 = $277,000

b. Current ratio = Current assets ÷ Current liabilities

= $628,000 ÷ $351,000 = 1.79 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $387,000 ÷ $351,000 = 1.10 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $190,000 + $0 + $197,000 = $387,000

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,330,000 ÷ $198,500 = 6.70 (rounded)
*Average accounts receivable =
($197,000 + $200,000) ÷ 2 = $198,500

e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 6.70 = 54.5 days (rounded)

f. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $740,000 ÷ $216,000 = 3.43 (rounded)
*Average inventory = ($232,000 + $200,000) ÷ 2 = $216,000
g. Average sale period = 365 days ÷ Inventory turnover
= 365 days ÷ 3.43 = 106.4 days (rounded)

h. Operating cycle = Average sale period + Average collection period

= 106.4 days + 54.5 days = 160.9 days

i. Total asset turnover = Sales ÷ Average total assets*

= $1,330,000 ÷ $1,311,500 = 1.01 (rounded)
*Average total assets = ($1,323,000 + $1,300,000) ÷ 2 = $1,311,500
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
252. Financial statements for Rardin Corporation appear below:

Rardin Corporation
Balance Sheet
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities................... $ 160 $ 160
Accounts receivable, net.............................. 180 160
Inventory...................................................... 160 180
Prepaid expenses........................................ 80 70
Total current assets......................................... 580 570
Noncurrent assets:
Plant & equipment, net................................. 1,180 1,110
Total assets..................................................... $1,760 $1,680

Current liabilities:
Accounts payable......................................... $ 130 $ 140
Accrued liabilities......................................... 40 60
Notes payable, short term............................ 290 280
Total current liabilities...................................... 460 480
Noncurrent liabilities:
Bonds payable............................................. 260 300
Total liabilities.................................................. 720 780
Stockholders' equity:
Common stock, $5 par................................. 160 160
Additional paid-in capital.............................. 250 250
Retained earnings........................................ 630 490
Total stockholders' equity................................ 1,040 900
Total liabilities & stockholders' equity.............. $1,760 $1,680

Rardin Corporation
Income Statement
 Sales (all on account)....................................... $1,900
Cost of goods sold........................................... 1,330
Gross margin................................................... 570
Selling and administrative expense.................. 220
Net operating income....................................... 350
Interest expense.............................................. 30
Net income before taxes.................................. 320
Income taxes (30%)......................................... 96
Net income....................................................... $ 224

Required:
Compute the following for Year 2:
a. Current ratio.
b. Acid-test (quick) ratio.
c. Average collection period.
d. Inventory turnover.
e. Times interest earned ratio.
f. Debt-to-equity ratio.
Answer:
a. Current ratio = Current assets ÷ Current liabilities
= $580 ÷ $460 = 1.26

b. Acid-test ratio = Quick assets* ÷ Current liabilities

= $340 ÷ $460 = 0.74
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $160 + $180 = $340

c. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,900 ÷ $170 = 11.18
*Average accounts receivable = ($180 + $160) ÷ 2 = $170

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 11.18 = 32.7 days

d. Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $1,330 ÷ $170 = 7.82
*Average inventory balance = ($160 + $180) ÷ 2 = $170

e. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $350 ÷ $30 = 11.67

f. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $720 ÷ $1,040 = 0.69
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
[QUESTION]
253. Mondok Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 139,000 $ 140,000
Accounts receivable, net .................................. 222,000 230,000
Inventory........................................................... 109,000 120,000
Prepaid expenses............................................. 68,000 70,000
Total current assets.............................................. 538,000 560,000
Plant and equipment, net..................................... 857,000 800,000
Total assets.......................................................... $1,395,000 $1,360,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 186,000 $ 180,000
Accrued liabilities.............................................. 34,000 30,000
Notes payable, short term................................. 64,000 60,000
Total current liabilities.......................................... 284,000 270,000
Bonds payable..................................................... 130,000 130,000
Total liabilities...................................................... 414,000 400,000
Stockholders' equity:
Common stock, $2 par value............................ 100,000 100,000
Additional paid-in capital................................... 90,000 90,000
Retained earnings............................................. 791,000 770,000
Total stockholders' equity..................................... 981,000 960,000
Total liabilities & stockholders' equity................... $1,395,000 $1,360,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,280,000

Cost of goods sold............................................... 840,000
Gross margin....................................................... 440,000
Operating expenses............................................. 387,231
Net operating income........................................... 52,769
Interest expense.................................................. 12,000
Net income before taxes...................................... 40,769
Income taxes (35%)............................................. 14,269
Net income........................................................... $ 26,500

Required:
a. What is the company’s working capital at the end of Year 2?
b. What is the company’s current ratio at the end of Year 2?
c. What is the company’s acid-test (quick) ratio at the end of Year 2?
d. What is the company’s accounts receivable turnover for Year 2?
e. What is the company’s average collection period for Year 2?
f. What is the company’s inventory turnover for Year 2?
g. What is the company’s average sale period for Year 2?
h. What is the company’s operating cycle for Year 2?
i. What is the company’s total asset turnover for Year 2?
j. What is the company’s times interest earned ratio for Year 2?
k. What is the company’s debt-to-equity ratio at the end of Year 2?
l. What is the company’s equity multiplier at the end of Year 2?
Answer:
a. Working capital = Current assets – Current liabilities
= $538,000 – $284,000 = $254,000

b. Current ratio = Current assets ÷ Current liabilities

= $538,000 ÷ $284,000 = 1.89 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $361,000 ÷ $284,000 = 1.27 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $139,000 + $0 + $222,000 = $361,000

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,280,000 ÷ $226,000 = 5.66 (rounded)
*Average accounts receivable =
($222,000 + $230,000) ÷ 2 = $226,000

e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.66 = 64.5 days (rounded)

f. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $840,000 ÷ $114,500 = 7.34 (rounded)
*Average inventory = ($109,000 + $120,000) ÷ 2 = $114,500

g. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 7.34 = 49.7 days (rounded)

h. Operating cycle = Average sale period + Average collection period

= 49.7 days + 64.5 days = 114.2 days

i. Total asset turnover = Sales ÷ Average total assets*

= $1,280,000 ÷ $1,377,500 = 0.93 (rounded)
*Average total assets = ($1,395,000 + $1,360,000) ÷ 2 = $1,377,500

j. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $52,769 ÷ $12,000 = 4.40 (rounded)

k. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $414,000 ÷ $981,000 = 0.42 (rounded)

l. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,377,500 ÷ $970,500 = 1.42 (rounded)
*Average total assets = ($1,395,000 + $1,360,000) ÷ 2 = $1,377,500
**Average stockholders' equity = ($981,000 + $960,000) ÷ 2 = $970,500
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
254. Two-Rivers Inc. (TRI) manufactures a variety of consumer products. The company's founders have run
the company for thirty years and are now interested in retiring. Consequently, they are seeking a purchaser,
and a group of investors is looking into the acquisition of TRI. To evaluate its financial stability, TRI was
requested to provide its latest financial statements and selected financial ratios. Summary information
provided by TRI is presented below.

TRI
Statement of Income
For the Year Ended November 30, Year 2
(In thousands)

Sales (net)........................................................ $31,000

Costs and expenses:
Cost of goods sold........................................ 17,600
Selling and administrative expense.............. 3,550
Depreciation and amortization expense........ 1,890
Interest expense........................................... 900
Total costs and expenses................................ 23,940
Income before taxes......................................... 7,060
Income taxes.................................................... 2,900
Net Income....................................................... $ 4,160

TRI
Balance Sheet
As of November 30
(in thousands)
Year 2 Year 1
Cash............................................................. $ 400 $ 500
Marketable securities.................................... 500 200
Accounts receivable, net............................... 3,200 2,900
Inventory....................................................... 5,800 5,400
Total current assets...................................... 9,900 9,000
Property, plant, & equipment, net................. 7,100 7,000
Total assets.................................................. $17,000 $16,000

Accounts payable......................................... $ 3,700 $ 3,400

Income taxes payable................................... 900 800
Accrued expenses........................................ 1,700 1,400
Total current liabilities................................... 6,300 5,600
Long-term debt............................................. 2,000 1,800
Total liabilities............................................... 8,300 7,400
Common stock. $1 par value........................ 2,700 2,700
Additional paid-in capital............................... 1,000 1,000
Retained earnings......................................... 5,000 4,900
Total stockholders' equity............................. 8,700 8,600
Total liabilities and stockholders' equity........ $17,000 $16,000

Selected Financial Ratios

TRI TRI Industry
 Year 1 Year 0 Average
Current ratio............................ 1.62 1.61 1.63
Acid-test (quick) ratio.............. 0.63 0.64 0.68
Times interest earned ratio..... 8.50 8.55 8.45
Debt to equity ratio................. 1.02 0.94 1.03
Inventory turnover................... 3.21 3.17 3.18

Required:
a. Calculate the select financial ratios for the fiscal year Year 2.
b. Interpret what each of these financial ratios means in terms of TRI's financial stability and operating
efficiency.
Answer:
a. The calculation of selected financial ratios for TRI for Year 2 follows.

• Current ratio = Current assets ÷ Current liabilities

= $9,900 ÷ $6,300 = 1.57

• Acid-test ratio = (Cash + Marketable securities + Accounts receivable) ÷ Current liabilities

= ($400 + $500 +$3,200) ÷ $6,300 = 0.65

• Times interest earned = Income before interest expense and income taxes ÷ Interest expense
= ($7,060 + $900) ÷ $900 = 8.8

• Debt-to-equity = Total liabilities ÷ Stockholders’ equity

= $8,300 ÷ $8,700 = 0.95

• Inventory turnover = Cost of goods sold ÷ Average Inventory

= $17,600 ÷ [($5,800 + $5,400)/2] = = 3.14

b. Interpretations of the financial ratios:

• TRI's current ratio has declined over the last three years. This declining trend, coupled with the fact that the
current ratio is below the industry average, is probably not yet a major concern. However, the current ratio
should be monitored.

• The acid-test (quick) ratio has improved over the last three years; however, it is still below the industry
average. Furthermore, an acid-test ratio below 1 indicates that TRI may have difficulty meeting its short-term
obligations.

• TRI's times interest earned ratio has been improving over the last three years and is above the industry
average. This indicates that the relationship between profits and interest expense is favorable and is one
indication that TRI might consider increasing its debt—-particularly if there are attractive investment
opportunities.

• TRI’s debt to equity ratio has deteriorated slightly in Year 2 but has been below the industry average over
the last three years. This indicates that TRI should be able to raise additional financing through debt and still
remain below the industry average.

• TRI’s inventory turnover ratio has been steadily declining and is below the industry average. This may
indicate a decline in operating efficiency, problems with obsolete inventory, or overpriced stocks.
Difficulty: 3 Hard
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Source: CMA, adapted

[QUESTION]
255. Financial statements for Praeger Corporation appear below:

Praeger Corporation
Balance Sheet
December 31, Year 2 and Year 1
(dollars in thousands)

Year 2 Year 1
Current assets:
Cash and marketable securities................... $ 100 $ 100
Accounts receivable, net.............................. 170 170
Inventory...................................................... 110 110
Prepaid expenses........................................ 60 60
Total current assets......................................... 440 440
Noncurrent assets:
Plant & equipment, net................................. 2,020 1,990
Total assets..................................................... $2,460 $2,430

Current liabilities:
Accounts payable......................................... $ 140 $ 170
Accrued liabilities......................................... 70 50
Notes payable, short term............................ 100 120
Total current liabilities...................................... 310 340
Noncurrent liabilities:
Bonds payable............................................. 500 500
Total liabilities.................................................. 810 840
Stockholders' equity:
Common stock, $5 par................................. 200 200
Additional paid-in capital.............................. 300 300
Retained earnings........................................ 1,150 1,090
Total stockholders' equity................................ 1,650 1,590
Total liabilities & stockholders' equity.............. $2,460 $2,430

Praeger Corporation
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)....................................... $1,100

Cost of goods sold........................................... 770
Gross margin................................................... 330
Selling and administrative expense.................. 130
Net operating income....................................... 200
Interest expense.............................................. 50
Net income before taxes.................................. 150
Income taxes (30%)......................................... 45
Net income....................................................... $ 105

Dividends during Year 2 totaled $45 thousand. The market price of a share of common stock on December
31, Year 2 was $30.
Required:
Compute the following for Year 2:
a. Return on total assets.
b. Working capital.
c. Current ratio.
d. Acid-test (quick) ratio.
e. Accounts receivable turnover.
f. Average collection period.
g. Inventory turnover.
h. Average sale period.
i. Times interest earned ratio.
j. Debt-to-equity ratio.
Answer:
a. Return on total assets = Adjusted net income* ÷ Average total assets**
= $140 ÷ $2,445 = 5.73%
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $105 + [$50 × (1 – 0.30)] = $140
**Average total assets = ($2,460 + $2,430) ÷ 2 = $2,445

b. Working capital = Current assets – Current liabilities

= $440 – $310 = $130

c. Current ratio = Current assets ÷ Current liabilities

= $440 ÷ $310 = 1.42

d. Acid-test ratio = Quick assets* ÷ Current liabilities

= $270 ÷ $310 = 0.87
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $100 + $170 = $270

e. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,100 ÷ $170 = 6.47
*Average accounts receivable = ($170 + $170) ÷ 2 = $170

f. Average collection period = 365 days ÷ Accounts receivable turnover*

= 365 ÷ 6.47 = 56.4 days
*See above

g. Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $770 ÷ $110 = 7.00
*Average inventory balance = ($110 + $110) ÷ 2 = $110

h. Average sale period = 365 days ÷ Inventory turnover*

= 365 ÷7.00 = 52.1 days
*See above

i. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $200 ÷ $50 = 4.00

j. Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $810 ÷ $1,650 = 0.49
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
256. Kaloi Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 205,000 $ 190,000
Accounts receivable, net .................................. 192,000 200,000
Inventory........................................................... 118,000 130,000
Prepaid expenses............................................. 41,000 40,000
Total current assets.............................................. 556,000 560,000
Plant and equipment, net..................................... 813,000 770,000
Total assets.......................................................... $1,369,000 $1,330,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 115,000 $ 100,000
Accrued liabilities.............................................. 27,000 30,000
Notes payable, short term................................. 55,000 60,000
Total current liabilities.......................................... 197,000 190,000
Bonds payable..................................................... 130,000 130,000
Total liabilities...................................................... 327,000 320,000
Stockholders' equity:
Common stock, $2 par value............................ 100,000 100,000
Additional paid-in capital................................... 60,000 60,000
Retained earnings............................................. 882,000 850,000
Total stockholders' equity..................................... 1,042,000 1,010,000
Total liabilities & stockholders' equity................... $1,369,000 $1,330,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,370,000

Cost of goods sold............................................... 830,000
Gross margin....................................................... 540,000
Operating expenses............................................. 478,286
Net operating income........................................... 61,714
Interest expense.................................................. 11,000
Net income before taxes...................................... 50,714
Income taxes (30%)............................................. 15,214
Net income........................................................... $ 35,500
Dividends on common stock during Year 2 totaled $3,500. The market price of common stock at the end of
Year 2 was $7.46 per share.

Required:
a. What is the company’s working capital at the end of Year 2?
b. What is the company’s current ratio at the end of Year 2?
c. What is the company’s acid-test (quick) ratio at the end of Year 2?
d. What is the company’s accounts receivable turnover for Year 2?
e. What is the company’s average collection period for Year 2?
f. What is the company’s inventory turnover for Year 2?
g. What is the company’s average sale period for Year 2?
h. What is the company’s operating cycle for Year 2?
i. What is the company’s total asset turnover for Year 2?
j. What is the company’s times interest earned ratio for Year 2?
k. What is the company’s debt-to-equity ratio at the end of Year 2?
l. What is the company’s equity multiplier at the end of Year 2?
m. What is the company’s net profit margin percentage for Year 2?
n. What is the company’s gross margin percentage for Year 2?
o. What is the company’s return on total assets for Year 2?
p. What is the company’s return on equity for Year 2?
Answer:
a. Working capital = Current assets – Current liabilities
= $556,000 – $197,000 = $359,000

b. Current ratio = Current assets ÷ Current liabilities

= $556,000 ÷ $197,000 = 2.82 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $397,000 ÷ $197,000 = 2.02 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $205,000 + $0 + $192,000 = $397,000

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,370,000 ÷ $196,000 = 6.99 (rounded)
*Average accounts receivable =
($192,000 + $200,000) ÷ 2 = $196,000

e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 6.99 = 52.2 days (rounded)

f. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $830,000 ÷ $124,000 = 6.69 (rounded)
*Average inventory = ($118,000 + $130,000) ÷ 2 = $124,000

g. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 6.69 = 54.6 days (rounded)

h. Operating cycle = Average sale period + Average collection period

= 54.6 days + 52.2 days = 106.8 days

i. Total asset turnover = Sales ÷ Average total assets*

= $1,370,000 ÷ $1,349,500 = 1.02 (rounded)
*Average total assets = ($1,369,000 + $1,330,000) ÷ 2 = $1,349,500

j. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $61,714 ÷ $11,000 = 5.61 (rounded)
k. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $327,000 ÷ $1,042,000 = 0.31 (rounded)

l. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,349,500 ÷ $1,026,000 = 1.32 (rounded)
*Average total assets = ($1,369,000 + $1,330,000) ÷ 2 = $1,349,500
**Average stockholders' equity = ($1,042,000 + $1,010,000) ÷ 2 = $1,026,000

m. Net profit margin percentage = Net income ÷ Sales

= $35,500 ÷ $1,370,000 = 2.6% (rounded)

n. Gross margin percentage = Gross margin ÷ Sales

= $540,000 ÷ $1,370,000 = 39.4% (rounded)

o. Return on total assets = Adjusted net income* ÷ Average total assets**

= $43,200 ÷ $1,349,500 = 3.20% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $35,500 + [$11,000 × (1 – 0.30)] = $43,200
**Average total assets = ($1,369,000 + $1,330,000) ÷ 2 = $1,349,500

p. Return on equity = Net income ÷ Average stockholders' equity*

= $35,500 ÷ $1,026,000 = 3.46% (rounded)
*Average stockholders' equity = ($1,042,000 + $1,010,000) ÷ 2 = $1,026,000
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
257. Hyrkas Corporation's most recent balance sheet and income statement appear below:

Balance Sheet
December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash.................................................................... $ 150 $ 190
Accounts receivable, net..................................... 220 240
Inventory............................................................. 190 160
Prepaid expenses............................................... 20 20
Total current assets................................................ 580 610
Plant and equipment, net........................................ 760 740
Total assets............................................................ $1,340 $1,350

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable................................................ $ 160 $ 190
Accrued liabilities................................................ 50 50
 Notes payable, short term................................... 40 40
Total current liabilities............................................. 250 280
Bonds payable........................................................ 150 180
Total liabilities......................................................... 400 460
Stockholders’ equity:
Common stock, $2 par value............................... 200 200
Additional paid-in capital..................................... 330 330
Retained earnings............................................... 410 360
Total stockholders’ equity....................................... 940 890
Total liabilities & stockholders’ equity..................... $1,340 $1,350

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account)................................. $1,200
Cost of goods sold..................................... 730
Gross margin.............................................. 470
Selling and administrative expense............ 335
Net operating income................................. 135
Interest expense......................................... 21
Net income before taxes............................ 114
Income taxes (30%)................................... 34
Net income................................................. $ 80

Dividends on common stock during Year 2 totaled $30 thousand. The market price of common stock at the
end of Year 2 was $6.90 per share.

Required:
Compute the following for Year 2:
a. Gross margin percentage.
b. Earnings per share.
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test (quick) ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned ratio.
q. Debt-to-equity ratio.
Answer:
a. Gross margin percentage = Gross margin ÷ Sales
= $470 ÷ $1,200 = 39.2%

b. Earnings per share = Net income ÷ Average number of common shares outstanding*
= $80 ÷ (100 shares + 100 shares)/2 = $0.80 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares

c. Price-earnings ratio = Market price per share ÷ Earnings per share (see above)
= $6.90 per share ÷ $0.80 per share = 8.625

d. Dividend payout ratio = Dividends per share* ÷ Earnings per share (see above)
= $0.30 per share ÷ $0.80 per share = 37.5%
*Dividends per share = Dividends ÷ Number of common shares outstanding (see above)
= $30 ÷ 100 shares = $0.30 per share

e. Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $0.30 per share ÷ $6.90 per share = 4.35%

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $94.7 ÷ $1,345 = 7.04%
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $80 + [$21 × (1 – 0.30)] = $94.7
**Average total assets = ($1,340 + $1,350) ÷ 2 = $1,345

g. Return on equity = Net income ÷ Average total stockholders’ equity*

= $80 ÷ $715 = 11.2%
*Average total stockholders’ equity = ($740 + $690) ÷ 2 = $715

h. Book value per share = Total stockholders’ equity ÷ Number of common shares outstanding*
= $940 ÷ 100 shares = $9.40 per share
*Number of common shares outstanding = Common stock ÷ Par value
= $200 ÷ $2 per share = 100 shares

i. Working capital = Current assets – Current liabilities

= $580 – $250 = $330

j. Current ratio = Current assets ÷ Current liabilities

= $580 ÷ $250 = 2.32

k. Acid-test ratio = Quick assets* ÷ Current liabilities

= $370 ÷ $250 = 1.48
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable
= $150 + $0 + $220 + $0 = $370

l. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,200 ÷ $230 = 5.22
*Average accounts receivable = ($220 + $240) ÷ 2 = $230

m. Average collection period = 365 days ÷ Accounts receivable turnover (see above)
= 365 days ÷ 5.22 = 69.9 days

n. Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $730 ÷ $175 = 4.17
*Average inventory balance = ($190 + $160) ÷ 2 = $175

o. Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 4.17 = 87.5 days

p. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $135 ÷ $21 = 6.43

q. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $400 ÷ $940 = 0.43
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
258. Kisselburg Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 243,000 $ 180,000
Accounts receivable, net .................................. 123,000 120,000
Inventory........................................................... 106,000 110,000
Prepaid expenses............................................. 41,000 50,000
Total current assets.............................................. 513,000 460,000
Plant and equipment, net..................................... 663,000 700,000
Total assets.......................................................... $1,176,000 $1,160,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 96,000 $ 110,000
Accrued liabilities.............................................. 44,000 50,000
Notes payable, short term................................. 93,000 90,000
Total current liabilities.......................................... 233,000 250,000
Bonds payable..................................................... 260,000 260,000
Total liabilities...................................................... 493,000 510,000
Stockholders' equity:
Common stock, $2 par value............................ 160,000 160,000
Additional paid-in capital................................... 50,000 50,000
Retained earnings............................................. 473,000 440,000
Total stockholders' equity..................................... 683,000 650,000
Total liabilities & stockholders' equity................... $1,176,000 $1,160,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,360,000

Cost of goods sold............................................... 800,000
Gross margin....................................................... 560,000
Operating expenses............................................. 482,077
Net operating income........................................... 77,923
Interest expense.................................................. 21,000
Net income before taxes...................................... 56,923
 Income taxes (35%)............................................. 19,923
Net income........................................................... $ 37,000

Dividends on common stock during Year 2 totaled $4,000. The market price of common stock at the end of
Year 2 was $5.75 per share.

Required:
a. What is the company’s working capital at the end of Year 2?
b. What is the company’s current ratio at the end of Year 2?
c. What is the company’s acid-test (quick) ratio at the end of Year 2?
d. What is the company’s accounts receivable turnover for Year 2?
e. What is the company’s average collection period for Year 2?
f. What is the company’s inventory turnover for Year 2?
g. What is the company’s average sale period for Year 2?
h. What is the company’s operating cycle for Year 2?
i. What is the company’s total asset turnover for Year 2?
j. What is the company’s times interest earned ratio for Year 2?
k. What is the company’s debt-to-equity ratio at the end of Year 2?
l. What is the company’s equity multiplier at the end of Year 2?
m. What is the company’s net profit margin percentage for Year 2?
n. What is the company’s gross margin percentage for Year 2?
o. What is the company’s return on total assets for Year 2?
p. What is the company’s return on equity for Year 2?
q. What is the company’s earnings per share for Year 2?
r. What is the company’s price-earnings ratio for Year 2?
s. What is the company’s dividend payout ratio for Year 2?
t. What is the company’s dividend yield ratio for Year 2?
u. What is the company’s book value per share at the end of Year 2?
Answer:
a. Working capital = Current assets – Current liabilities
= $513,000 – $233,000 = $280,000

b. Current ratio = Current assets ÷ Current liabilities

= $513,000 ÷ $233,000 = 2.20 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $366,000 ÷ $233,000 = 1.57 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $243,000 + $0 + $123,000 = $366,000

d. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,360,000 ÷ $121,500 = 11.19 (rounded)
*Average accounts receivable =
($123,000 + $120,000) ÷ 2 = $121,500

e. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 11.19 = 32.6 days (rounded)

f. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $800,000 ÷ $108,000 = 7.41 (rounded)
*Average inventory = ($106,000 + $110,000) ÷ 2 = $108,000

g. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 7.41 = 49.3 days (rounded)

h. Operating cycle = Average sale period + Average collection period

= 49.3 days + 32.6 days = 81.9 days

i. Total asset turnover = Sales ÷ Average total assets*

= $1,360,000 ÷ $1,168,000 = 1.16 (rounded)
*Average total assets = ($1,176,000 + $1,160,000) ÷ 2 = $1,168,000

j. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $77,923 ÷ $21,000 = 3.71 (rounded)

k. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $493,000 ÷ $683,000 = 0.72 (rounded)

l. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,168,000 ÷ $666,500 = 1.75 (rounded)
*Average total assets = ($1,176,000 + $1,160,000) ÷ 2 = $1,168,000
**Average stockholders' equity = ($683,000 + $650,000) ÷ 2 = $666,500

m. Net profit margin percentage = Net income ÷ Sales

= $37,000 ÷ $1,360,000 = 2.7% (rounded)

n. Gross margin percentage = Gross margin ÷ Sales

= $560,000 ÷ $1,360,000 = 41.2% (rounded)

o. Return on total assets = Adjusted net income* ÷ Average total assets**

= $50,650 ÷ $1,168,000 = 4.34% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $37,000 + [$21,000 × (1 – 0.35)] = $50,650
**Average total assets = ($1,176,000 + $1,160,000) ÷ 2 = $1,168,000

p. Return on equity = Net income ÷ Average stockholders' equity*

= $37,000 ÷ $666,500 = 5.55% (rounded)
*Average stockholders' equity = ($683,000 + $650,000) ÷ 2 = $666,500

q. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $37,000 ÷ 80,000 shares = $0.46 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $160,000 ÷ $2 per share = 80,000 shares

r. Price-earnings ratio = Market price per share ÷ Earnings per share

= $5.75 ÷ $0.46 = 12.50 (rounded)

s. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.05 ÷ $0.46 = 10.9% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,000 ÷ 80,000 shares = $0.05 per share (rounded)

t. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.05 ÷ $5.75 = 0.87% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,000 ÷ 80,000 shares = $0.05 per share (rounded)

u. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $683,000 ÷ 80,000 shares = $8.54 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $160,000 ÷ $2 per share = 80,000 shares
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-04
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
259. M. K. Berry is the managing director of CE Ltd. a small, family-owned company which manufactures
cutlery. His company belongs to a trade association which publishes a monthly magazine. The latest issue of
the magazine contains a very brief article based on the analysis of the accounting statements published by
the 40 companies which manufacture this type of product. The article contains the following table:

Average for all companies

in the industry
Return on equity.............................................. 33%
Return on total assets...................................... 29%
Gross margin percentage................................ 30%
Current ratio.................................................... 1.9:1
Average sale period......................................... 37 days
Average collection period................................ 41 days

CE Ltd's latest financial statements are as follows:

CE Ltd.
Income Statement
for the year ended 31 October
(in thousands)

Sales....................................................... $900
Cost of goods sold................................... 720
Gross margin........................................... 180
Selling and administrative expenses....... 55
Interest.................................................... 15
Net income.............................................. $110

The country in which the company operates has no corporate income tax. No dividends were paid during the
year. All sales are on account.

CE Ltd.
Balance Sheets
as of 31 October
(in thousands)

This Year Last Year

Current assets:
Cash.......................................................... $ 5 $ 20
Accounts receivable, net........................... 120 110
Inventories................................................. 96 80
Noncurrent assets......................................... 500 460
 Total assets.................................................. $721 $670

Current liabilities:
Accounts payable...................................... $147 $206
Noncurrent liabilities:
Bonds payable........................................... 150 150
Common stock.............................................. 100 100
Retained earnings......................................... 324 214
Total liabilities and stockholders’ equity........ $721 $670

Required:
a. Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE
Ltd's performance in comparison to the industrial averages.
b. Explain why it could be misleading to compare CE Ltd's ratios with those taken from the article.
Answer:
A.
Return on equity = Net income ÷ Average total stockholders' equity*
= $110 ÷ $369 = 29.8%
*Average total stockholders’ equity = [($100 +$324) + ($100 + $214)] ÷ 2 = $369

Return on total assets = {Net income + [Interest expense × (1 – Tax rate)]} ÷ Average total assets*
= {$110 + [$15 × (1 – 0.00)]} ÷ $695.5 = 18.0%
*Average total assets = ($721 + $670) ÷ 2 = $695.5

Gross margin percentage = Gross margin ÷ Sales

= $180 ÷ $900 = 20%

Current ratio = Current assets* ÷ Current liabilities

= $221 ÷ $147 = 1.5
*Current assets = $5 + $120 + $96 = $221

Inventory turnover = Cost of goods sold ÷ Average inventory balance

= $720 ÷ [($96 + $80) ÷ 2] = 8.2 (rounded)
Average sale period = 365 days ÷ Inventory turnover*
= 365 days ÷ 8.2 = 45 days (rounded)

Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance*

= $900 ÷ $115 = 7.8 (rounded)
*Average accounts receivable balance = ($120 + $110) ÷ 2 = $115
Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 7.8 = 47 days (rounded)

CE Ltd's return on stockholders' equity is not as good as the industry’s average. For every dollar invested,
stockholders are obtaining a return which is smaller than they should expect, based on the article's figures.
Similarly, the return on total assets is much less than the average. This indicates that the company is unable
to make good use of the funds invested in the company.

CE Ltd's gross margin percentage is also lower than average--perhaps because its selling prices are lower
than the average or its cost of sales are higher.

The current ratio indicates that CE Ltd's current assets are greater than its current liabilities by a factor of 1.5.
The industry average shows an even higher figure, with current assets amounting to almost double current
liabilities.

Most companies aim to turn over inventory as quickly as possible, in order to improve cash flow. CE Ltd is not
managing to do this as quickly as the industry's average of 37 days. Similarly, companies should try to obtain
payment from customers as soon as possible. CE Ltd is taking much longer to do this than the average for
the industry.

B.
Care must be taken when comparing CE Ltd's ratios with industry averages because there may be
differences in accounting methods. Although accounting standards have reduced the range of acceptable
accounting policies, there is still scope for different firms to apply different accounting policies. For example,
one firm may use straight-line depreciation, while another may use accelerated depreciation. These variations
make comparisons difficult.

Size differences may also mean that ratios are not comparable. A very large manufacturing business should
be able to achieve economies of scale which are not possible for CE Ltd. For example, large companies may
be able to negotiate sizable discounts from suppliers.

A third problem arises from differences in product range. CE Ltd may produce cutlery which is sold at the top
end of the market, for very high prices, and in small volumes. Alternatively, it may be producing high-volume,
low quality cutlery for the catering industry. Either situation will reduce the value of comparisons with the
industry average.
Difficulty: 3 Hard
Learning Objective: 15-02
Learning Objective: 15-03
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Communication
AICPA: BB Critical Thinking
AICPA: FN Measurement
Source: CIMA, adapted

[QUESTION]
260. Neiger Corporation has provided the following financial data:

Balance Sheet

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 216,000 $ 160,000
Accounts receivable, net .................................. 131,000 120,000
Inventory........................................................... 104,000 120,000
Prepaid expenses............................................. 12,000 10,000
Total current assets.............................................. 463,000 410,000
Plant and equipment, net..................................... 858,000 870,000
Total assets.......................................................... $1,321,000 $1,280,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 109,000 $ 100,000
Accrued liabilities.............................................. 59,000 60,000
Notes payable, short term................................. 58,000 60,000
Total current liabilities.......................................... 226,000 220,000
Bonds payable..................................................... 120,000 120,000
Total liabilities...................................................... 346,000 340,000
Stockholders' equity:
 Common stock, $2 par value............................ 100,000 100,000
Additional paid-in capital................................... 60,000 60,000
Retained earnings............................................. 815,000 780,000
Total stockholders' equity..................................... 975,000 940,000
Total liabilities & stockholders' equity................... $1,321,000 $1,280,000

Income Statement
Sales (all on account)........................................... $1,320,000
Cost of goods sold............................................... 750,000
Gross margin....................................................... 570,000
Operating expenses............................................. 507,571
Net operating income........................................... 62,429
Interest expense.................................................. 11,000
Net income before taxes...................................... 51,429
Income taxes (30%)............................................. 15,429
Net income........................................................... $ 36,000

Required:
a. What is the company’s working capital at the end of Year 2?
b. What is the company’s current ratio at the end of Year 2?
c. What is the company’s acid-test (quick) ratio at the end of Year 2?
d. What is the company’s times interest earned ratio for Year 2?
e. What is the company’s debt-to-equity ratio at the end of Year 2?
f. What is the company’s equity multiplier at the end of Year 2?
Answer:
a. Working capital = Current assets – Current liabilities
= $463,000 – $226,000 = $237,000

b. Current ratio = Current assets ÷ Current liabilities

= $463,000 ÷ $226,000 = 2.05 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $347,000 ÷ $226,000 = 1.54 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $216,000 + $0 + $131,000 = $347,000

d. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $62,429 ÷ $11,000 = 5.68 (rounded)

e. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $346,000 ÷ $975,000 = 0.35 (rounded)

f. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,300,500 ÷ $957,500 = 1.36 (rounded)
*Average total assets = ($1,321,000 + $1,280,000) ÷ 2 = $1,300,500
**Average stockholders' equity = ($975,000 + $940,000) ÷ 2 = $957,500
Difficulty: 2 Medium
Learning Objective: 15-02
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
261. Walker Corporation has provided the following financial data:

Year 2 Year 1
Current assets:
Cash................................................................. $195,000 $150,000
Accounts receivable, net .................................. 186,000 180,000
Inventory........................................................... 165,000 170,000
Prepaid expenses............................................. 29,000 30,000
Total current assets.............................................. $575,000 $530,000
Total current liabilities.......................................... $254,000 $270,000
Total liabilities...................................................... $434,000 $450,000
Total stockholders' equity..................................... $988,000 $960,000

The company’s net operating income for Year 2 was $63,615 and its interest expense was $15,000.

Required:
a. What is the company’s working capital at the end of Year 2?
b. What is the company’s current ratio at the end of Year 2?
c. What is the company’s acid-test (quick) ratio at the end of Year 2?
d. What is the company’s times interest earned ratio for Year 2?
e. What is the company’s debt-to-equity ratio at the end of Year 2?
f. What is the company’s equity multiplier at the end of Year 2?
Answer:
a. Working capital = Current assets – Current liabilities
= $575,000 – $254,000 = $321,000

b. Current ratio = Current assets ÷ Current liabilities

= $575,000 ÷ $254,000 = 2.26 (rounded)

c. Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $381,000 ÷ $254,000 = 1.50 (rounded)
*Quick assets = Cash + Marketable securities + Current receivables
= $195,000 + $0 + $186,000 = $381,000

d. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $63,615 ÷ $15,000 = 4.24 (rounded)

e. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $434,000 ÷ $988,000 = 0.44 (rounded)

f. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,416,000 ÷ $974,000 = 1.45 (rounded)
*Average total assets = ($1,422,000 + $1,410,000) ÷ 2 = $1,416,000
**Average stockholders' equity = ($988,000 + $960,000) ÷ 2 = $974,000
Difficulty: 1 Easy
Learning Objective: 15-02
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
262. Data from Ben Corporation's most recent balance sheet and income statement appear below:

This Year Last Year

Accounts receivable, net. . $104,000 $124,000
Inventory.......................... $159,000 $188,000
Sales on account............. $825,000
Cost of goods sold........... $660,000

Required:
Compute the average sale period for this year:
Answer:
Average sale period = 365 days ÷ Inventory turnover*
= 365 days ÷ 3.80 = 96.1 days
*Inventory turnover = Cost of goods sold ÷ Average inventory balance*
= $660,000 ÷ $173,500 = 3.80
**Average inventory = ($159,000 + $188,000) ÷ 2 = $173,500
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
263. Dilisio Corporation has provided the following data:

This Year Last Year

Accounts receivable, net. . $126,000 $116,000
Inventory.......................... $226,000 $194,000
Sales on account............. $659,000
Cost of goods sold........... $417,000

Required:
Compute the inventory turnover for this year:
Answer:
Inventory turnover = Cost of goods sold ÷ Average inventory balance*
= $417,000 ÷ $210,000 = 1.99
*Average inventory balance = ($226,000 + $194,000) ÷ 2 = $210,000
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
264. Hagle Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1
 Assets Year 2 Year 1
Current assets:
Cash................................................................. $ 279,000 $ 170,000
Accounts receivable, net .................................. 136,000 150,000
Inventory........................................................... 141,000 150,000
Prepaid expenses............................................. 69,000 60,000
Total current assets.............................................. 625,000 530,000
Plant and equipment, net..................................... 789,000 870,000
Total assets.......................................................... $1,414,000 $1,400,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 186,000 $ 190,000
Accrued liabilities.............................................. 29,000 30,000
Notes payable, short term................................. 74,000 70,000
Total current liabilities.......................................... 289,000 290,000
Bonds payable..................................................... 130,000 130,000
Total liabilities...................................................... 419,000 420,000
Stockholders' equity:
Common stock, $4 par value............................ 200,000 200,000
Additional paid-in capital................................... 90,000 90,000
Retained earnings............................................. 705,000 690,000
Total stockholders' equity..................................... 995,000 980,000
Total liabilities & stockholders' equity................... $1,414,000 $1,400,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,280,000

Cost of goods sold............................................... 750,000
Gross margin....................................................... 530,000
Operating expenses............................................. 489,429
Net operating income........................................... 40,571
Interest expense.................................................. 12,000
Net income before taxes...................................... 28,571
Income taxes (30%)............................................. 8,571
Net income........................................................... $ 20,000

Required:
a. What is the company’s accounts receivable turnover for Year 2?
b. What is the company’s average collection period for Year 2?
c. What is the company’s inventory turnover for Year 2?
d. What is the company’s average sale period for Year 2?
e. What is the company’s operating cycle for Year 2?
f. What is the company’s total asset turnover for Year 2?
Answer:
a. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,280,000 ÷ $143,000 = 8.95 (rounded)
*Average accounts receivable =
($136,000 + $150,000) ÷ 2 = $143,000
b. Average collection period = 365 days ÷ Accounts receivable turnover
= 365 days ÷ 8.95 = 40.8 days (rounded)

c. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $750,000 ÷ $145,500 = 5.15 (rounded)
*Average inventory = ($141,000 + $150,000) ÷ 2 = $145,500

d. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 5.15 = 70.9 days (rounded)

e. Operating cycle = Average sale period + Average collection period

= 70.9 days + 40.8 days = 111.7 days

f. Total asset turnover = Sales ÷ Average total assets*

= $1,280,000 ÷ $1,407,000 = 0.91 (rounded)
*Average total assets = ($1,414,000 + $1,400,000) ÷ 2 = $1,407,000
Difficulty: 2 Medium
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
265. Data from Dalpiaz Corporation's most recent balance sheet and income statement appear below:

This Year Last Year

Accounts receivable, net. . $104,000 $114,000
Inventory.......................... $157,000 $165,000
Sales on account............. $647,000
Cost of goods sold........... $438,000

Required:
Compute the average collection period for this year:
Answer:
Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 days ÷ 5.94 = 61.4 days
*Accounts receivable turnover = Sales on account ÷ Average accounts receivable balance**
= $647,000 ÷ $109,000 = 5.94
**Average accounts receivable = ($104,000 + $114,000) ÷ 2 = $109,000
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
266. Kestner Corporation has provided the following financial data:

Year 2 Year 1
Accounts receivable, net ........... $195,000 $200,000
 Inventory.................................... $97,000 $100,000
Total assets................................ $1,432,000 $1,410,000
Sales (all on account)................. $1,360,000
Cost of goods sold...................... $870,000

Required:
a. What is the company’s accounts receivable turnover for Year 2?
b. What is the company’s average collection period for Year 2?
c. What is the company’s inventory turnover for Year 2?
d. What is the company’s average sale period for Year 2?
e. What is the company’s operating cycle for Year 2?
f. What is the company’s total asset turnover for Year 2?
Answer:
a. Accounts receivable turnover = Sales on account ÷ Average accounts receivable*
= $1,360,000 ÷ $197,500 = 6.89 (rounded)
*Average accounts receivable =
($195,000 + $200,000) ÷ 2 = $197,500

b. Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 6.89 = 53.0 days (rounded)

c. Inventory turnover = Cost of goods sold ÷ Average inventory*

= $870,000 ÷ $98,500 = 8.83 (rounded)
*Average inventory = ($97,000 + $100,000) ÷ 2 = $98,500

d. Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 8.83 = 41.3 days (rounded)

e. Operating cycle = Average sale period + Average collection period

= 41.3 days + 53.0 days = 94.3 days

f. Total asset turnover = Sales ÷ Average total assets*

= $1,360,000 ÷ $1,421,000 = 0.96 (rounded)
*Average total assets = ($1,432,000 + $1,410,000) ÷ 2 = $1,421,000
Difficulty: 1 Easy
Learning Objective: 15-03
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
267. Wyand Corporation's net operating income last year was $212,000; its interest expense was $26,000; its
total stockholders' equity was $1,000,000; and its total liabilities were $370,000.

Required:
Compute the following for Year 2:
a. Times interest earned ratio.
b. Debt-to-equity ratio.
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $212,000 ÷ $26,000 = 8.15
b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity
= $370,000 ÷ $1,000,000 = 0.37
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
268. Fraction Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,447,000 $1,430,000
Total liabilities...................................................... $310,000 $310,000
Total stockholders' equity..................................... $1,137,000 $1,120,000
Net operating income........................................... $38,571
Interest expense.................................................. $10,000

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $38,571 ÷ $10,000 = 3.86 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $310,000 ÷ $1,137,000 = 0.27 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,438,500 ÷ $1,128,500 = 1.27 (rounded)
*Average total assets = ($1,447,000 + $1,430,000) ÷ 2 = $1,438,500
**Average stockholders' equity = ($1,137,000 + $1,120,000) ÷ 2 = $1,128,500
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
269. Babbitt Corporation has provided the following data from its most recent income statement:

Net operating income............ $94,000

Interest expense.................... $62,000
Net income before taxes........ $32,000
Income taxes......................... $10,000
Net income............................ $22,000

Required:
Compute the times interest earned ratio. Show your work!
Answer:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $94,000 ÷ $62,000 = 1.52
Difficulty: 1 Easy
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
270. Gambino Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 139,000 $ 190,000
Accounts receivable, net .................................. 206,000 180,000
Inventory........................................................... 103,000 100,000
Prepaid expenses............................................. 95,000 90,000
Total current assets.............................................. 543,000 560,000
Plant and equipment, net..................................... 999,000 970,000
Total assets.......................................................... $1,542,000 $1,530,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 109,000 $ 120,000
Accrued liabilities.............................................. 44,000 50,000
Notes payable, short term................................. 65,000 60,000
Total current liabilities.......................................... 218,000 230,000
Bonds payable..................................................... 220,000 220,000
Total liabilities...................................................... 438,000 450,000
Stockholders' equity:
Common stock, $5 par value............................ 350,000 350,000
Additional paid-in capital................................... 60,000 60,000
Retained earnings............................................. 694,000 670,000
Total stockholders' equity..................................... 1,104,000 1,080,000
Total liabilities & stockholders' equity................... $1,542,000 $1,530,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,370,000

Cost of goods sold............................................... 860,000
Gross margin....................................................... 510,000
Operating expenses............................................. 445,308
Net operating income........................................... 64,692
Interest expense.................................................. 17,000
Net income before taxes...................................... 47,692
 Income taxes (35%)............................................. 16,692
Net income........................................................... $ 31,000

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $64,692 ÷ $17,000 = 3.81 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $438,000 ÷ $1,104,000 = 0.40 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,536,000 ÷ $1,092,000 = 1.41 (rounded)
*Average total assets = ($1,542,000 + $1,530,000) ÷ 2 = $1,536,000
**Average stockholders' equity = ($1,104,000 + $1,080,000) ÷ 2 = $1,092,000
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
271. Sidell Corporation's most recent balance sheet and income statement appear below:

Balance Sheet
December 31, Year 2 and Year 1
(in thousands of dollars)
Assets Year 2 Year 1
Current assets:
Cash.................................................................... $ 180 $ 100
Accounts receivable, net..................................... 220 200
Inventory............................................................. 180 200
Prepaid expenses............................................... 20 20
Total current assets................................................ 600 520
Plant and equipment, net........................................ 660 720
Total assets............................................................ $1,260 $1,240

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable................................................ $ 130 $ 130
Accrued liabilities................................................ 20 20
Notes payable, short term................................... 100 90
Total current liabilities............................................. 250 240
Bonds payable........................................................ 180 200
Total liabilities......................................................... 430 440
Stockholders’ equity:
Common stock, $1 par value............................... 200 200
Additional paid-in capital..................................... 300 300
Retained earnings............................................... 330 300
Total stockholders’ equity....................................... 830 800
 Total liabilities & stockholders’ equity..................... $1,260 $1,240

Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account)................................. $1,230
Cost of goods sold..................................... 780
Gross margin.............................................. 450
Selling and administrative expense............ 235
Net operating income................................. 215
Interest expense......................................... 29
Net income before taxes............................ 186
Income taxes (30%)................................... 56
Net income................................................. $ 130

Required:
Compute the following for Year 2:
a. Times interest earned ratio.
b. Debt-to-equity ratio.
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $215 ÷ $29 = 7.41

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $430 ÷ $830 = 0.52
Difficulty: 2 Medium
Learning Objective: 15-04
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
272. Lindboe Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 190,000 $ 190,000
Accounts receivable, net .................................. 225,000 210,000
Inventory........................................................... 172,000 190,000
Prepaid expenses............................................. 83,000 70,000
Total current assets.............................................. 670,000 660,000
Plant and equipment, net..................................... 877,000 870,000
Total assets.......................................................... $1,547,000 $1,530,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 176,000 $ 180,000
Accrued liabilities.............................................. 25,000 30,000
Notes payable, short term................................. 36,000 40,000
 Total current liabilities.......................................... 237,000 250,000
Bonds payable..................................................... 160,000 160,000
Total liabilities...................................................... 397,000 410,000
Stockholders' equity:
Common stock, $2 par value............................ 160,000 160,000
Additional paid-in capital................................... 100,000 100,000
Retained earnings............................................. 890,000 860,000
Total stockholders' equity..................................... 1,150,000 1,120,000
Total liabilities & stockholders' equity................... $1,547,000 $1,530,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,220,000

Cost of goods sold............................................... 700,000
Gross margin....................................................... 520,000
Operating expenses............................................. 458,286
Net operating income........................................... 61,714
Interest expense.................................................. 12,000
Net income before taxes...................................... 49,714
Income taxes (30%)............................................. 14,914
Net income........................................................... $ 34,800

Dividends on common stock during Year 2 totaled $4,800. The market price of common stock at the end of
Year 2 was $5.46 per share.

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s net profit margin percentage for Year 2?
e. What is the company’s gross margin percentage for Year 2?
f. What is the company’s return on total assets for Year 2?
g. What is the company’s return on equity for Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $61,714 ÷ $12,000 = 5.14 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $397,000 ÷ $1,150,000 = 0.35 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,538,500 ÷ $1,135,000 = 1.36 (rounded)
*Average total assets = ($1,547,000 + $1,530,000) ÷ 2 = $1,538,500
**Average stockholders' equity = ($1,150,000 + $1,120,000) ÷ 2 = $1,135,000

d. Net profit margin percentage = Net income ÷ Sales

= $34,800 ÷ $1,220,000 = 2.9% (rounded)

e. Gross margin percentage = Gross margin ÷ Sales

= $520,000 ÷ $1,220,000 = 42.6% (rounded)

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $43,200 ÷ $1,538,500 = 2.81% (rounded)
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $34,800 + [$12,000 × (1 – 0.30)] = $43,200
**Average total assets = ($1,547,000 + $1,530,000) ÷ 2 = $1,538,500

g. Return on equity = Net income ÷ Average stockholders' equity*

= $34,800 ÷ $1,135,000 = 3.07% (rounded)
*Average stockholders' equity = ($1,150,000 + $1,120,000) ÷ 2 = $1,135,000
Difficulty: 2 Medium
Learning Objective: 15-04
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
273. Schepp Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,320,000 $1,290,000
Total liabilities...................................................... $468,000 $450,000
Total stockholders' equity..................................... $852,000 $840,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,440,000

Cost of goods sold............................................... 880,000
Gross margin....................................................... 560,000
Operating expenses............................................. 527,857
Net operating income........................................... 32,143
Interest expense.................................................. 10,000
Net income before taxes...................................... 22,143
Income taxes (30%)............................................. 6,643
Net income........................................................... $ 15,500

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s net profit margin percentage for Year 2?
e. What is the company’s gross margin percentage for Year 2?
f. What is the company’s return on total assets for Year 2?
g. What is the company’s return on equity for Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $32,143 ÷ $10,000 = 3.21 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $468,000 ÷ $852,000 = 0.55 (rounded)
c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,305,000 ÷ $846,000 = 1.54 (rounded)
*Average total assets = ($1,320,000 + $1,290,000) ÷ 2 = $1,305,000
**Average stockholders' equity = ($852,000 + $840,000) ÷ 2 = $846,000

d. Net profit margin percentage = Net income ÷ Sales

= $15,500 ÷ $1,440,000 = 1.1% (rounded)

e. Gross margin percentage = Gross margin ÷ Sales

= $560,000 ÷ $1,440,000 = 38.9% (rounded)

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $22,500 ÷ $1,305,000 = 1.72% (rounded)
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $15,500 + [$10,000 × (1 – 0.30)] = $22,500
**Average total assets = ($1,320,000 + $1,290,000) ÷ 2 = $1,305,000

g. Return on equity = Net income ÷ Average stockholders' equity*

= $15,500 ÷ $846,000 = 1.83% (rounded)
*Average stockholders' equity = ($852,000 + $840,000) ÷ 2 = $846,000
Difficulty: 1 Easy
Learning Objective: 15-04
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
274. Brill Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,360,000 $1,320,000
Total liabilities...................................................... $601,000 $570,000
Common stock, $2 par value............................... $140,000 $140,000
Total common stockholders' equity...................... $759,000 $750,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,300,000

Cost of goods sold............................................... 900,000
Gross margin....................................................... 400,000
Operating expenses............................................. 364,143
Net operating income........................................... 35,857
Interest expense.................................................. 20,000
Net income before taxes...................................... 15,857
Income taxes (30%)............................................. 4,757
Net income........................................................... $ 11,100

Dividends on common stock during Year 2 totaled $2,100. The market price of common stock at the end of
Year 2 was $2.32 per share.
Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s net profit margin percentage for Year 2?
e. What is the company’s gross margin percentage for Year 2?
f. What is the company’s return on total assets for Year 2?
g. What is the company’s return on equity for Year 2?
h. What is the company’s earnings per share for Year 2?
i. What is the company’s price-earnings ratio for Year 2?
j. What is the company’s dividend payout ratio for Year 2?
k. What is the company’s dividend yield ratio for Year 2?
l. What is the company’s book value per share at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $35,857 ÷ $20,000 = 1.79 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $601,000 ÷ $759,000 = 0.79 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,340,000 ÷ $754,500 = 1.78 (rounded)
*Average total assets = ($1,360,000 + $1,320,000) ÷ 2 = $1,340,000
**Average stockholders' equity = ($759,000 + $750,000) ÷ 2 = $754,500

d. Net profit margin percentage = Net income ÷ Sales

= $11,100 ÷ $1,300,000 = 0.9% (rounded)

e. Gross margin percentage = Gross margin ÷ Sales

= $400,000 ÷ $1,300,000 = 30.8% (rounded)

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $25,100 ÷ $1,340,000 = 1.87% (rounded)
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $11,100 + [$20,000 × (1 – 0.30)] = $25,100
**Average total assets = ($1,360,000 + $1,320,000) ÷ 2 = $1,340,000

g. Return on equity = Net income ÷ Average stockholders' equity*

= $11,100 ÷ $754,500 = 1.47% (rounded)
*Average stockholders' equity = ($759,000 + $750,000) ÷ 2 = $754,500

h. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $11,100 ÷ 70,000 shares = $0.16 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares

i. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $11,100 ÷ 70,000 shares = $0.16 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $2.32 ÷ $0.16 = 14.50 (rounded)

j. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $11,100 ÷ 70,000 shares = $0.16 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.03 ÷ $0.16 = 18.8% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,100 ÷ 70,000 shares = $0.03 per share (rounded)

k. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.03 ÷ $2.32 = 1.29% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,100 ÷ 70,000 shares = $0.03 per share (rounded)

l. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $759,000 ÷ 70,000 shares = $10.84 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares
Difficulty: 1 Easy
Learning Objective: 15-04
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
275. Jaquez Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,466,000 $1,460,000
Total liabilities...................................................... $573,000 $590,000
Stockholders' equity:
Common stock, $3 par value............................ $300,000 $300,000
Additional paid-in capital................................... 60,000 60,000
Retained earnings............................................. 533,000 510,000
Total stockholders' equity..................................... $893,000 $870,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,450,000

Cost of goods sold............................................... 850,000
Gross margin....................................................... 600,000
Operating expenses............................................. 530,231
Net operating income........................................... 69,769
Interest expense.................................................. 19,000
Net income before taxes...................................... 50,769
Income taxes (35%)............................................. 17,769
Net income........................................................... $ 33,000
Dividends on common stock during Year 2 totaled $10,000. The market price of common stock at the end of
Year 2 was $5.45 per share.

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s net profit margin percentage for Year 2?
e. What is the company’s gross margin percentage for Year 2?
f. What is the company’s return on total assets for Year 2?
g. What is the company’s return on equity for Year 2?
h. What is the company’s earnings per share for Year 2?
i. What is the company’s price-earnings ratio for Year 2?
j. What is the company’s dividend payout ratio for Year 2?
k. What is the company’s dividend yield ratio for Year 2?
l. What is the company’s book value per share at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $69,769 ÷ $19,000 = 3.67 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $573,000 ÷ $893,000 = 0.64 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,463,000 ÷ $881,500 = 1.66 (rounded)
*Average total assets = ($1,466,000 + $1,460,000) ÷ 2 = $1,463,000
**Average stockholders' equity = ($893,000 + $870,000) ÷ 2 = $881,500

d. Net profit margin percentage = Net income ÷ Sales

= $33,000 ÷ $1,450,000 = 2.3% (rounded)

e. Gross margin percentage = Gross margin ÷ Sales

= $600,000 ÷ $1,450,000 = 41.4% (rounded)

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $45,350 ÷ $1,463,000 = 3.10% (rounded)
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $33,000 + [$19,000 × (1 – 0.35)] = $45,350
**Average total assets = ($1,466,000 + $1,460,000) ÷ 2 = $1,463,000

g. Return on equity = Net income ÷ Average stockholders' equity*

= $33,000 ÷ $881,500 = 3.74% (rounded)
*Average stockholders' equity = ($893,000 + $870,000) ÷ 2 = $881,500

h. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $33,000 ÷ 100,000 shares = $0.33 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares

i. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $33,000 ÷ 100,000 shares = $0.33 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $5.45 ÷ $0.33 = 16.52 (rounded)

j. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $33,000 ÷ 100,000 shares = $0.33 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.10 ÷ $0.33 = 30.3% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $10,000 ÷ 100,000 shares = $0.10 per share (rounded)

k. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.10 ÷ $5.45 = 1.83% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $10,000 ÷ 100,000 shares = $0.10 per share (rounded)

l. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $893,000 ÷ 100,000 shares = $8.93 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares
Difficulty: 1 Easy
Learning Objective: 15-04
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
276. Medina Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 271,000 $ 190,000
Accounts receivable, net .................................. 215,000 190,000
Inventory........................................................... 117,000 100,000
Prepaid expenses............................................. 25,000 30,000
Total current assets.............................................. 628,000 510,000
Plant and equipment, net..................................... 726,000 800,000
Total assets.......................................................... $1,354,000 $1,310,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 198,000 $ 170,000
Accrued liabilities.............................................. 58,000 60,000
Notes payable, short term................................. 102,000 90,000
Total current liabilities.......................................... 358,000 320,000
 Bonds payable..................................................... 140,000 140,000
Total liabilities...................................................... 498,000 460,000
Stockholders' equity:
Common stock, $5 par value............................ 500,000 500,000
Additional paid-in capital................................... 80,000 80,000
Retained earnings............................................. 276,000 270,000
Total stockholders' equity..................................... 856,000 850,000
Total liabilities & stockholders' equity................... $1,354,000 $1,310,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,280,000

Cost of goods sold............................................... 840,000
Gross margin....................................................... 440,000
Operating expenses............................................. 413,692
Net operating income........................................... 26,308
Interest expense.................................................. 14,000
Net income before taxes...................................... 12,308
Income taxes (35%)............................................. 4,308
Net income........................................................... $ 8,000

Dividends on common stock during Year 2 totaled $2,000. The market price of common stock at the end of
Year 2 was $1.49 per share.

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s net profit margin percentage for Year 2?
e. What is the company’s gross margin percentage for Year 2?
f. What is the company’s return on total assets for Year 2?
g. What is the company’s return on equity for Year 2?
h. What is the company’s earnings per share for Year 2?
i. What is the company’s price-earnings ratio for Year 2?
j. What is the company’s dividend payout ratio for Year 2?
k. What is the company’s dividend yield ratio for Year 2?
l. What is the company’s book value per share at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $26,308 ÷ $14,000 = 1.88 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $498,000 ÷ $856,000 = 0.58 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,332,000 ÷ $853,000 = 1.56 (rounded)
*Average total assets = ($1,354,000 + $1,310,000) ÷ 2 = $1,332,000
**Average stockholders' equity = ($856,000 + $850,000) ÷ 2 = $853,000

d. Net profit margin percentage = Net income ÷ Sales

= $8,000 ÷ $1,280,000 = 0.6% (rounded)
e. Gross margin percentage = Gross margin ÷ Sales
= $440,000 ÷ $1,280,000 = 34.4% (rounded)

f. Return on total assets = Adjusted net income* ÷ Average total assets**

= $17,100 ÷ $1,332,000 = 1.28% (rounded)
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $8,000 + [$14,000 × (1 – 0.35)] = $17,100
**Average total assets = ($1,354,000 + $1,310,000) ÷ 2 = $1,332,000

g. Return on equity = Net income ÷ Average stockholders' equity*

= $8,000 ÷ $853,000 = 0.94% (rounded)
*Average stockholders' equity = ($856,000 + $850,000) ÷ 2 = $853,000

h. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $8,000 ÷ 100,000 shares = $0.08 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares

i. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $8,000 ÷ 100,000 shares = $0.08 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares

Price-earnings ratio = Market price per share ÷ Earnings per share

= $1.49 ÷ $0.08 = 18.63 (rounded)

j. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $8,000 ÷ 100,000 shares = $0.08 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares

Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.02 ÷ $0.08 = 25.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,000 ÷ 100,000 shares = $0.02 per share (rounded)

k. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.02 ÷ $1.49 = 1.34% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,000 ÷ 100,000 shares = $0.02 per share (rounded)

l. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $856,000 ÷ 100,000 shares = $8.56 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $500,000 ÷ $5 per share = 100,000 shares
Difficulty: 2 Medium
Learning Objective: 15-04
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:
[QUESTION]
277. Tobia Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 201,000 $ 110,000
Accounts receivable, net .................................. 236,000 200,000
Inventory........................................................... 158,000 190,000
Prepaid expenses............................................. 96,000 90,000
Total current assets.............................................. 691,000 590,000
Plant and equipment, net..................................... 842,000 920,000
Total assets.......................................................... $1,533,000 $1,510,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 173,000 $ 150,000
Accrued liabilities.............................................. 36,000 40,000
Notes payable, short term................................. 88,000 90,000
Total current liabilities.......................................... 297,000 280,000
Bonds payable..................................................... 170,000 170,000
Total liabilities...................................................... 467,000 450,000
Stockholders' equity:
Common stock, $3 par value............................ 210,000 210,000
Additional paid-in capital................................... 60,000 60,000
Retained earnings............................................. 796,000 790,000
Total stockholders' equity..................................... 1,066,000 1,060,000
Total liabilities & stockholders' equity................... $1,533,000 $1,510,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,410,000

Cost of goods sold............................................... 850,000
Gross margin....................................................... 560,000
Operating expenses............................................. 525,077
Net operating income........................................... 34,923
Interest expense.................................................. 16,000
Net income before taxes...................................... 18,923
Income taxes (35%)............................................. 6,623
Net income........................................................... $ 12,300

Dividends on common stock during Year 2 totaled $6,300. The market price of common stock at the end of
Year 2 was $1.78 per share.

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s earnings per share for Year 2?
e. What is the company’s price-earnings ratio for Year 2?
f. What is the company’s dividend payout ratio for Year 2?
g. What is the company’s dividend yield ratio for Year 2?
h. What is the company’s book value per share at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $34,923 ÷ $16,000 = 2.18 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $467,000 ÷ $1,066,000 = 0.44 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,521,500 ÷ $1,063,000 = 1.43 (rounded)
*Average total assets = ($1,533,000 + $1,510,000) ÷ 2 = $1,521,500
**Average stockholders' equity = ($1,066,000 + $1,060,000) ÷ 2 = $1,063,000

d. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $12,300 ÷ 70,000 shares = $0.18 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $210,000 ÷ $3 per share = 70,000 shares

e. Price-earnings ratio = Market price per share ÷ Earnings per share

= $1.78 ÷ $0.18 = 9.89 (rounded)

f. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.09 ÷ $0.18 = 50.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $6,300 ÷ 70,000 shares = $0.09 per share (rounded)

g. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.09 ÷ $1.78 = 5.06% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $6,300 ÷ 70,000 shares = $0.09 per share (rounded)

h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $1,066,000 ÷ 70,000 shares = $15.23 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $210,000 ÷ $3 per share = 70,000 shares
Difficulty: 2 Medium
Learning Objective: 15-04
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
278. Vogelsberg Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,286,000 $1,240,000
Total liabilities...................................................... $356,000 $340,000
 Stockholders' equity:
Common stock, $3 par value............................ $270,000 $270,000
Additional paid-in capital................................... 90,000 90,000
Retained earnings............................................. 570,000 540,000
Total stockholders' equity..................................... $930,000 $900,000

The company’s net operating income in Year 2 was $62,308; its interest expense was $12,000; and its net
income was $32,700. Dividends on common stock during Year 2 totaled $2,700. The market price of common
stock at the end of Year 2 was $6.37 per share.

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s earnings per share for Year 2?
e. What is the company’s price-earnings ratio for Year 2?
f. What is the company’s dividend payout ratio for Year 2?
g. What is the company’s dividend yield ratio for Year 2?
h. What is the company’s book value per share at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $62,308 ÷ $12,000 = 5.19 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $356,000 ÷ $930,000 = 0.38 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,263,000 ÷ $915,000 = 1.38 (rounded)
*Average total assets = ($1,286,000 + $1,240,000) ÷ 2 = $1,263,000
**Average stockholders' equity = ($930,000 + $900,000) ÷ 2 = $915,000

d. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $32,700 ÷ 90,000 shares = $0.36 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share = 90,000 shares

e. Price-earnings ratio = Market price per share ÷ Earnings per share

= $6.37 ÷ $0.36 = 17.69 (rounded)

f. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.03 ÷ $0.36 = 8.3% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,700 ÷ 90,000 shares = $0.03 per share (rounded)

g. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.03 ÷ $6.37 = 0.47% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,700 ÷ 90,000 shares = $0.03 per share (rounded)

h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $930,000 ÷ 90,000 shares = $10.33 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $270,000 ÷ $3 per share =90,000 shares
Difficulty: 1 Easy
Learning Objective: 15-04
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
279. Remley Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,441,000 $1,390,000
Total liabilities...................................................... $539,000 $500,000
Stockholders' equity:
Common stock, $3 par value............................ $180,000 $180,000
Additional paid-in capital................................... 90,000 90,000
Retained earnings............................................. 632,000 620,000
Total stockholders' equity..................................... $902,000 $890,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,360,000

Cost of goods sold............................................... 840,000
Gross margin....................................................... 520,000
Operating expenses............................................. 480,923
Net operating income........................................... 39,077
Interest expense.................................................. 16,000
Net income before taxes...................................... 23,077
Income taxes (35%)............................................. 8,077
Net income........................................................... $ 15,000

Dividends on common stock during Year 2 totaled $3,000. The market price of common stock at the end of
Year 2 was $2.70 per share.

Required:
a. What is the company’s times interest earned ratio for Year 2?
b. What is the company’s debt-to-equity ratio at the end of Year 2?
c. What is the company’s equity multiplier at the end of Year 2?
d. What is the company’s earnings per share for Year 2?
e. What is the company’s price-earnings ratio for Year 2?
f. What is the company’s dividend payout ratio for Year 2?
g. What is the company’s dividend yield ratio for Year 2?
h. What is the company’s book value per share at the end of Year 2?
Answer:
a. Times interest earned = Earnings before interest expense and income taxes ÷ Interest expense
= $39,077 ÷ $16,000 = 2.44 (rounded)

b. Debt-to-equity ratio = Total liabilities ÷ Stockholders’ equity

= $539,000 ÷ $902,000 = 0.60 (rounded)

c. Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,415,500 ÷ $896,000 = 1.58 (rounded)
*Average total assets = ($1,441,000 + $1,390,000) ÷ 2 = $1,415,500
**Average stockholders' equity = ($902,000 + $890,000) ÷ 2 = $896,000

d. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $15,000 ÷ 60,000 shares = $0.25 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $180,000 ÷ $3 per share = 60,000 shares

e. Price-earnings ratio = Market price per share ÷ Earnings per share

= $2.70 ÷ $0.25 = 10.80 (rounded)

f. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.05 ÷ $0.25 = 20.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $3,000 ÷ 60,000 shares = $0.05 per share (rounded)

g. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.05 ÷ $2.70 = 1.85% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $3,000 ÷ 60,000 shares = $0.05 per share (rounded)

h. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $902,000 ÷ 60,000 shares = $15.03 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $180,000 ÷ $3 per share = 60,000 shares
Difficulty: 1 Easy
Learning Objective: 15-04
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
280. Pribyl Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,476,000 $1,450,000
Total stockholders' equity..................................... $1,013,000 $1,000,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,270,000

Cost of goods sold............................................... 720,000
Gross margin....................................................... 550,000
Operating expenses............................................. 506,846
Net operating income........................................... 43,154
Interest expense.................................................. 17,000
Net income before taxes...................................... 26,154
Income taxes (35%)............................................. 9,154
 Net income........................................................... $ 17,000

Required:
a. What is the company’s net profit margin percentage for Year 2?
b. What is the company’s gross margin percentage for Year 2?
c. What is the company’s return on total assets for Year 2?
d. What is the company’s return on equity for Year 2?
Answer:
a. Net profit margin percentage = Net income ÷ Sales
= $17,000 ÷ $1,270,000 = 1.3% (rounded)

b. Gross margin percentage = Gross margin ÷ Sales

= $550,000 ÷ $1,270,000 = 43.3% (rounded)

c. Return on total assets = Adjusted net income* ÷ Average total assets**

= $28,050 ÷ $1,463,000 = 1.92% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $17,000 + [$17,000 × (1 – 0.35)] = $28,050
**Average total assets = ($1,476,000 + $1,450,000) ÷ 2 = $1,463,000

d. Return on equity = Net income ÷ Average stockholders' equity*

= $17,000 ÷ $1,006,500 = 1.69% (rounded)
*Average stockholders' equity = ($1,013,000 + $1,000,000) ÷ 2 = $1,006,500
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
281. Perrett Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,470,000 $1,450,000
Total stockholders' equity..................................... $954,000 $920,000
Sales (all on account)........................................... $1,200,000
Gross margin....................................................... $430,000
Interest expense.................................................. $22,000
Income taxes (35%)............................................. $21,269
Net income........................................................... $39,500

Required:
a. What is the company’s net profit margin percentage for Year 2?
b. What is the company’s gross margin percentage for Year 2?
c. What is the company’s return on total assets for Year 2?
d. What is the company’s return on equity for Year 2?
Answer:
a. Net profit margin percentage = Net income ÷ Sales
= $39,500 ÷ $1,200,000 = 3.3% (rounded)

b. Gross margin percentage = Gross margin ÷ Sales

= $430,000 ÷ $1,200,000 = 35.8% (rounded)
c. Return on total assets = Adjusted net income* ÷ Average total assets**
= $53,800 ÷ $1,460,000 = 3.68% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $39,500 + [$22,000 × (1 – 0.35)] = $53,800
**Average total assets = ($1,470,000 + $1,450,000) ÷ 2 = $1,460,000

d. Return on equity = Net income ÷ Average stockholders' equity*

= $39,500 ÷ $937,000 = 4.22% (rounded)
*Average stockholders' equity = ($954,000 + $920,000) ÷ 2 = $937,000
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
282. Jepson Corporation's most recent income statement appears below:

Sales (all on account)............................ $865,000

Cost of goods sold................................. 358,000
Gross margin......................................... 507,000
Selling and administrative expense....... 213,000
Net operating income............................ 294,000
Interest expense.................................... 48,000
Net income before taxes........................ 246,000
Income taxes......................................... 70,000
Net income............................................ $176,000

Required:
Compute the gross margin percentage.
Answer:
Gross margin percentage = Gross margin ÷ Sales
= $507,000 ÷ $865,000 = 58.6%
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
283. Gehlhausen Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 110,000 $ 160,000
Accounts receivable, net .................................. 256,000 250,000
 Inventory........................................................... 205,000 200,000
Prepaid expenses............................................. 33,000 30,000
Total current assets.............................................. 604,000 640,000
Plant and equipment, net..................................... 784,000 730,000
Total assets.......................................................... $1,388,000 $1,370,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 124,000 $ 140,000
Accrued liabilities.............................................. 85,000 80,000
Notes payable, short term................................. 57,000 50,000
Total current liabilities.......................................... 266,000 270,000
Bonds payable..................................................... 260,000 260,000
Total liabilities...................................................... 526,000 530,000
Stockholders' equity:
Common stock, $5 par value............................ 400,000 400,000
Additional paid-in capital................................... 100,000 100,000
Retained earnings............................................. 362,000 340,000
Total stockholders' equity..................................... 862,000 840,000
Total liabilities & stockholders' equity................... $1,388,000 $1,370,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,310,000

Cost of goods sold............................................... 710,000
Gross margin....................................................... 600,000
Operating expenses............................................. 538,538
Net operating income........................................... 61,462
Interest expense.................................................. 19,000
Net income before taxes...................................... 42,462
Income taxes (35%)............................................. 14,862
Net income........................................................... $ 27,600

Dividends on common stock during Year 2 totaled $5,600. The market price of common stock at the end of
Year 2 was $5.60 per share.

Required:
a. What is the company’s net profit margin percentage for Year 2?
b. What is the company’s gross margin percentage for Year 2?
c. What is the company’s return on total assets for Year 2?
d. What is the company’s return on equity for Year 2?
Answer:
a. Net profit margin percentage = Net income ÷ Sales
= $27,600 ÷ $1,310,000 = 2.1% (rounded)

b. Gross margin percentage = Gross margin ÷ Sales

= $600,000 ÷ $1,310,000 = 45.8% (rounded)

c. Return on total assets = Adjusted net income* ÷ Average total assets**

= $39,950 ÷ $1,379,000 = 2.90% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $27,600 + [$19,000 × (1 – 0.35)] = $39,950
**Average total assets = ($1,388,000 + $1,370,000) ÷ 2 = $1,379,000

d. Return on equity = Net income ÷ Average stockholders' equity*

= $27,600 ÷ $851,000 = 3.24% (rounded)
*Average stockholders' equity = ($862,000 + $840,000) ÷ 2 = $851,000
Difficulty: 2 Medium
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
284. Degollado Corporation's most recent income statement appears below:

Sales (all on account)............................ $140,000

Cost of goods sold................................. 60,000
Gross margin......................................... 80,000
Selling and administrative expense....... 30,000
Net operating income............................ 50,000
Interest expense.................................... 10,000
Net income before taxes........................ 40,000
Income taxes (30%)............................... 12,000
Net income............................................ $28,000

The beginning balance of total assets was $200,000 and the ending balance was $220,000.

Required:
Compute the return on total assets. Show your work!
Answer:
Average total assets = ($200,000 + $220,000) ÷ 2 = $210,000
Return on total assets = Adjusted net income* ÷ Average total assets
= $35,000 ÷ $210,000 = 16.7%
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $28,000 + [$10,000 × (1 – 0.30)] = $35,000
Difficulty: 1 Easy
Learning Objective: 15-05
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement

[QUESTION]
285. Marovich Corporation has provided the following financial data:

Year 2 Year 1
Total assets.......................................................... $1,332,000 $1,300,000
Common stock, $4 par value............................... $200,000 $200,000
Total stockholders' equity..................................... $1,042,000 $1,010,000

Income Statement
 For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,230,000

Cost of goods sold............................................... 810,000
Gross margin....................................................... 420,000
Operating expenses............................................. 355,615
Net operating income........................................... 64,385
Interest expense.................................................. 9,000
Net income before taxes...................................... 55,385
Income taxes (35%)............................................. 19,385
Net income........................................................... $ 36,000

Dividends on common stock during Year 2 totaled $4,000. The market price of common stock at the end of
Year 2 was $6.41 per share.

Required:
a. What is the company’s net profit margin percentage for Year 2?
b. What is the company’s gross margin percentage for Year 2?
c. What is the company’s return on total assets for Year 2?
d. What is the company’s return on equity for Year 2?
e. What is the company’s earnings per share for Year 2?
f. What is the company’s price-earnings ratio for Year 2?
g. What is the company’s dividend payout ratio for Year 2?
h. What is the company’s dividend yield ratio for Year 2?
i. What is the company’s book value per share at the end of Year 2?
Answer:
a. Net profit margin percentage = Net income ÷ Sales
= $36,000 ÷ $1,230,000 = 2.9% (rounded)

b. Gross margin percentage = Gross margin ÷ Sales

= $420,000 ÷ $1,230,000 = 34.1% (rounded)

c. Return on total assets = Adjusted net income* ÷ Average total assets**

= $41,850 ÷ $1,316,000 = 3.18% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $36,000 + [$9,000 × (1 – 0.35)] = $41,850
**Average total assets = ($1,332,000 + $1,300,000) ÷ 2 = $1,316,000

d. Return on equity = Net income ÷ Average stockholders' equity*

= $36,000 ÷ $1,026,000 = 3.51% (rounded)
*Average stockholders' equity = ($1,042,000 + $1,010,000) ÷ 2 = $1,026,000

e. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $36,000 ÷ 50,000 shares = $0.72 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $200,000 ÷ $4 per share = 50,000 shares

f. Price-earnings ratio = Market price per share ÷ Earnings per share

= $6.41 ÷ $0.72 = 8.90 (rounded)

g. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.08 ÷ $0.72 = 11.1% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,000 ÷ 50,000 shares = $0.08 per share (rounded)
h. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.08 ÷ $6.41 = 1.25% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,000 ÷ 50,000 shares = $0.08 per share (rounded)

i. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $1,042,000 ÷ 50,000 shares = $20.84 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $200,000 ÷ $4 per share = 50,000 shares
Difficulty: 1 Easy
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
286. Straton Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 208,000 $ 200,000
Accounts receivable, net .................................. 247,000 290,000
Inventory........................................................... 165,000 180,000
Prepaid expenses............................................. 56,000 50,000
Total current assets.............................................. 676,000 720,000
Plant and equipment, net..................................... 1,000,000 920,000
Total assets.......................................................... $1,676,000 $1,640,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 115,000 $ 120,000
Accrued liabilities.............................................. 107,000 90,000
Notes payable, short term................................. 68,000 70,000
Total current liabilities.......................................... 290,000 280,000
Bonds payable..................................................... 290,000 290,000
Total liabilities...................................................... 580,000 570,000
Stockholders' equity:
Common stock, $2 par value............................ 140,000 140,000
Additional paid-in capital................................... 90,000 90,000
Retained earnings............................................. 866,000 840,000
Total stockholders' equity..................................... 1,096,000 1,070,000
Total liabilities & stockholders' equity................... $1,676,000 $1,640,000

Income Statement
For the Year Ended December 31, Year 2
 Sales (all on account)........................................... $1,320,000
Cost of goods sold............................................... 860,000
Gross margin....................................................... 460,000
Operating expenses............................................. 394,769
Net operating income........................................... 65,231
Interest expense.................................................. 22,000
Net income before taxes...................................... 43,231
Income taxes (35%)............................................. 15,131
Net income........................................................... $ 28,100

Dividends on common stock during Year 2 totaled $2,100. The market price of common stock at the end of
Year 2 was $5.56 per share.

Required:
a. What is the company’s net profit margin percentage for Year 2?
b. What is the company’s gross margin percentage for Year 2?
c. What is the company’s return on total assets for Year 2?
d. What is the company’s return on equity for Year 2?
e. What is the company’s earnings per share for Year 2?
f. What is the company’s price-earnings ratio for Year 2?
g. What is the company’s dividend payout ratio for Year 2?
h. What is the company’s dividend yield ratio for Year 2?
i. What is the company’s book value per share at the end of Year 2?
Answer:
a. Net profit margin percentage = Net income ÷ Sales
= $28,100 ÷ $1,320,000 = 2.1% (rounded)

b. Gross margin percentage = Gross margin ÷ Sales

= $460,000 ÷ $1,320,000 = 34.8% (rounded)

c. Return on total assets = Adjusted net income* ÷ Average total assets**

= $42,400 ÷ $1,658,000 = 2.56% (rounded)
*Adjusted net income = Net income + [Interest expense × (1 – Tax rate)]
= $28,100 + [$22,000 × (1 – 0.35)] = $42,400
**Average total assets = ($1,676,000 + $1,640,000) ÷ 2 = $1,658,000

d. Return on equity = Net income ÷ Average stockholders' equity*

= $28,100 ÷ $1,083,000 = 2.59% (rounded)
*Average stockholders' equity = ($1,096,000 + $1,070,000) ÷ 2 = $1,083,000

e. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $28,100 ÷ 70,000 shares = $0.40 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares

f. Price-earnings ratio = Market price per share ÷ Earnings per share

= $5.56 ÷ $0.40 = 13.90 (rounded)

g. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.03 ÷ $0.40 = 7.5% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,100 ÷ 70,000 shares = $0.03 per share (rounded)

h. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.03 ÷ $5.56 = 0.54% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $2,100 ÷ 70,000 shares = $0.03 per share (rounded)

i. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $1,096,000 ÷ 70,000 shares = $15.66 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $140,000 ÷ $2 per share = 70,000 shares
Difficulty: 2 Medium
Learning Objective: 15-05
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
287. Moselle Corporation has provided the following financial data:

Balance Sheet
December 31, Year 2 and Year 1

Assets Year 2 Year 1

Current assets:
Cash................................................................. $ 252,000 $ 200,000
Accounts receivable, net .................................. 255,000 260,000
Inventory........................................................... 133,000 120,000
Prepaid expenses............................................. 18,000 20,000
Total current assets.............................................. 658,000 600,000
Plant and equipment, net..................................... 681,000 730,000
Total assets.......................................................... $1,339,000 $1,330,000

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable............................................. $ 177,000 $ 190,000
Accrued liabilities.............................................. 25,000 30,000
Notes payable, short term................................. 39,000 40,000
Total current liabilities.......................................... 241,000 260,000
Bonds payable..................................................... 200,000 200,000
Total liabilities...................................................... 441,000 460,000
Stockholders' equity:
Common stock, $4 par value............................ 240,000 240,000
Additional paid-in capital................................... 80,000 80,000
Retained earnings............................................. 578,000 550,000
Total stockholders' equity..................................... 898,000 870,000
Total liabilities & stockholders' equity................... $1,339,000 $1,330,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,400,000

 Cost of goods sold............................................... 900,000
Gross margin....................................................... 500,000
Operating expenses............................................. 436,462
Net operating income........................................... 63,538
Interest expense.................................................. 14,000
Net income before taxes...................................... 49,538
Income taxes (35%)............................................. 17,338
Net income........................................................... $ 32,200

Dividends on common stock during Year 2 totaled $4,200. The market price of common stock at the end of
Year 2 was $9.72 per share.

Required:
a. What is the company’s earnings per share for Year 2?
b. What is the company’s price-earnings ratio for Year 2?
c. What is the company’s dividend payout ratio for Year 2?
d. What is the company’s dividend yield ratio for Year 2?
e. What is the company’s book value per share at the end of Year 2?
Answer:
a. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $32,200 ÷ 60,000 shares = $0.54 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $240,000 ÷ $4 per share = 60,000 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share

= $9.72 ÷ $0.54 = 18.00 (rounded)

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.07 ÷ $0.54 = 13.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,200 ÷ 60,000 shares = $0.07 per share (rounded)

d. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.07 ÷ $9.72 = 0.72% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $4,200 ÷ 60,000 shares = $0.07 per share (rounded)

e. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $898,000 ÷ 60,000 shares = $14.97 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $240,000 ÷ $4 per share = 60,000 shares
Difficulty: 2 Medium
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
288. Mihok Corporation has provided the following financial data:

Year 2 Year 1
 Stockholders' equity:
Common stock, $3 par value............................ $300,000 $300,000
Additional paid-in capital................................... 100,000 100,000
Retained earnings............................................. 375,000 370,000
Total stockholders' equity..................................... $775,000 $770,000

Income Statement
For the Year Ended December 31, Year 2

Sales (all on account)........................................... $1,380,000

Cost of goods sold............................................... 780,000
Gross margin....................................................... 600,000
Operating expenses............................................. 567,714
Net operating income........................................... 32,286
Interest expense.................................................. 18,000
Net income before taxes...................................... 14,286
Income taxes (30%)............................................. 4,286
Net income........................................................... $ 10,000

Dividends on common stock during Year 2 totaled $5,000. The market price of common stock at the end of
Year 2 was $0.97 per share.

Required:
a. What is the company’s earnings per share for Year 2?
b. What is the company’s price-earnings ratio for Year 2?
c. What is the company’s dividend payout ratio for Year 2?
d. What is the company’s dividend yield ratio for Year 2?
e. What is the company’s book value per share at the end of Year 2?
Answer:
a. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $10,000 ÷ 100,000 shares = $0.10 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share

= $0.97 ÷ $0.10 = 9.70 (rounded)

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.05 ÷ $0.10 = 50.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $5,000 ÷ 100,000 shares = $0.05 per share (rounded)

d. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.05 ÷ $0.97 = 5.15% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $5,000 ÷ 100,000 shares = $0.05 per share (rounded)

e. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $775,000 ÷ 100,000 shares = $7.75 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
Feedback:

[QUESTION]
289. Sehrt Corporation has provided the following financial data:

Year 2 Year 1
Common stock, $3 par value...... $300,000 $300,000
Total stockholders' equity........... $803,000 $770,000

The company’s net income for Year 2 was $44,000. Dividends on common stock during Year 2 totaled
$11,000. The market price of common stock at the end of Year 2 was $6.29 per share.

Required:
a. What is the company’s earnings per share for Year 2?
b. What is the company’s price-earnings ratio for Year 2?
c. What is the company’s dividend payout ratio for Year 2?
d. What is the company’s dividend yield ratio for Year 2?
e. What is the company’s book value per share at the end of Year 2?
Answer:
a. Earnings per share = Net Income ÷ Average number of common shares outstanding*
= $44,000 ÷ 100,000 shares = $0.44 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares

b. Price-earnings ratio = Market price per share ÷ Earnings per share

= $6.29 ÷ $0.44 = 14.30 (rounded)

c. Dividend payout ratio = Dividends per share* ÷ Earnings per share

= $0.11 ÷ $0.44 = 25.0% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $11,000 ÷ 100,000 shares = $0.11 per share (rounded)

d. Dividend yield ratio = Dividends per share* ÷ Market price per share
= $0.11 ÷ $6.29 = 1.75% (rounded)
*Dividends per share = Common dividends ÷ Common shares (see above)
= $11,000 ÷ 100,000 shares = $0.11 per share (rounded)

e. Book value per share = Common stockholders' equity ÷ Number of common shares outstanding*
= $803,000 ÷ 100,000 shares = $8.03 per share (rounded)
*Number of common shares outstanding = Common stock ÷ Par value
= $300,000 ÷ $3 per share = 100,000 shares
Difficulty: 1 Easy
Learning Objective: 15-06
Topic Area:
Blooms: Apply
AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Measurement
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