In this chapter, we discussed the importance of analyzing financial results based on an understanding of the company’s business strategy. Using the ROE model, we illustrated how different strategies could earn high returns for investors. Assume that two companies in the same industry adopt fundamentally different strategies. One manufactures high-quality consumer electronics. Its products employ state-of-the-art technology, and the company offers a high level of customer service both before and after the sale. The other company emphasizes low cost with good performance. Its products utilize well-established technology but are never innovative. Customers buy these products at large, self-service warehouses and are expected to install the products using information contained in printed brochures. Which of the ratios discussed in this chapter would you expect to differ for these companies as a result of their different business strategies?
> The price/earnings ratio provides important information concerning the stock market’s assessment of the growth potential of a business. The following are price/earnings ratios for selected companies as of the date this book was written. Match the company
> You have the opportunity to invest $10,000 in one of two companies from a single industry. The only information you have is shown here. The word high refers to the top third of the industry; average is the middle third; low is the bottom third. Which com
> 1. The ____________ is the amount (a) payable at the maturity of the bond and (b) on which the periodiccash interest payments are computed. 2. ____________ is another name for bond principal, or the maturity amount of a bond. 3. ____________ is another n
> You have the opportunity to invest $10,000 in one of two companies from a single industry. The only information you have follows. The word high refers to the top third of the industry; average is the middle third; low is the bottom third. Which company w
> Hershey’s is a familiar name in snacks. There’s a good chance you have recently enjoyed one of itsproducts. The company manufactures confectionery products in a variety of packaged forms and marketsthem under more than
> Company A uses the FIFO method to cost inventory, and Company B uses the LIFO method. The two companies are exactly alike except for the difference in inventory costing methods. Costs of inventory items for both companies have been rising steadily in rec
> Use the 2012 data in P14-6 for Prince Company. Assume a stock price of $28 per share. Compute the appropriate ratios. Data from P14-6 The comparative financial statements prepared at December 31, 2012, for Prince Company showed the following summarized
> Use the data given in P14-6 for Prince Company. Required: 1. Present component percentages for 2012 only. 2. Respond to the following for 2012: a. What was the average percentage markup on sales? b. What was the average income tax rate? c. Compute the p
> The comparative financial statements prepared at December 31, 2012, for Prince Company showed the following summarized data: *One-third was credit sales. †During 2012, cash dividends amounting to $3,000 were declared and paid. Requi
> Positive financial leverage indicates a. Positive cash flow from financing activities. b. A debt-to-equity ratio higher than 1. c. A rate of return on assets exceeding the interest rate on debt. d. A profit margin in one year exceeding the previous year’
> Which of the following ratios is used to analyze liquidity? a. Earnings per share. b. Debt-to-equity ratio. c. Current ratio. d. Both (a) and (c).
> Which of the following would not change the receivables turnover ratio for a retail company? a. Increases in the retail prices of inventory. b. A change in credit policy. c. Increases in the cost incurred to purchase inventory. d. None of the above.
> A company has total assets of $500,000 and noncurrent assets of $400,000. Current liabilities are $40,000. What is the current ratio? a. 12.5 b. 10.0 c. 2.5 d. Cannot be determined without additional information.
> On January 1, 2011, Clearwater Corporation sold a $750,000, 8 percent bond issue (9 percent market rate). The bonds were dated January 1, 2011, pay interest each December 31, and mature in 10 years. Required: 1. Give the journal entry to record the issu
> A creditor is least likely to use what ratio when analyzing a company that has borrowed funds on a long-term basis? a. Cash coverage ratio. b. Debt-to-equity ratio. c. Times interest earned ratio. d. Profit margin.
> A decrease in selling and administrative expenses would impact what ratio? a. Fixed asset turnover ratio. b. Times interest earned ratio. c. Debt-to-equity ratio. d. Current ratio.
> Given the following ratios for four companies, which company is least likely to experience problems paying its current liabilities promptly? Quick Ratio Receivable Turnover Ratio a. 1.2 58 b. 1.2 45 C. 1.0 55 d. .5 60
> The average days’ supply in inventory for Natural Foods Stores is 14.6 days. The company reportedcost of goods sold in the amount of $1,500,000 and total sales of $2,500,000. What is the averageamount of inventory for Natural Foods? a. $102,740 b. $171,
> A company has quick assets of $300,000 and current liabilities of $150,000. The company purchased $50,000 in inventory on credit. After the purchase, the quick ratio would be a. 2.0 b. 2.3 c. 1.5 d. 1.75
> If a potential investor is analyzing three companies in the same industry and wishes to invest in onlyone, which ratio is least likely to affect the investor’s decision? a. Quick ratio. b. Earnings per share. c. Price to earnings ratio. d. Dividend yie
> A large retailer reported revenue of $1,665,000. The company’s gross profit percentage was 44 percent. What amount of cost of goods sold did the company report?
> Youngstown Corporation is considering changing its inventory method from FIFO to LIFO and wants to determine the impact on selected accounting ratios. In general, what impact would you expect on the following ratios: profit margin, fixed asset turnover r
> Ramesh Company has prepared draft financial results now being reviewed by the accountants. You notice that the financial leverage percentage is negative. You also note that the current ratio is 2.4 and the quick ratio is 3.7. You recognize that these fin
> A consumer products company reported a 5.4 percent increase in sales from 2011 to 2012. Sales in 2011 were $29,600. In 2012, the company reported cost of goods sold in the amount of $9,107. What was the gross profit percentage in 2012?
> GMAC Corporation issued a $100,000 bond that matures in five years. The bond has a stated interest rate of 6 percent. On January 1, 2011, when the bond was issued, the market rate was 8 percent. The bond pays interest twice per year, on June 30 and Decem
> A manufacturer reported an inventory turnover ratio of 8.6 during 2011. During 2012, management introduced a new inventory control system that was expected to reduce average inventory levels by 25 percent without affecting sales volume. Given these circu
> Compute the financial leverage percentage for 2012 given the following data: 2012 2011 Return on equity 21% 26% Return on assets 6. 8 Profit margin 12 12
> Compute the return on equity ratio for 2012 given the following data: 2012 2011 Net income S 183,000 $ 159,000 Stockholders' equity 1,100,000 1,250,000 Total assets 2,460,000 2,630,000 Interest expense 42,000 32,000
> An Internet company earned $6.50 per share and paid dividends of $3.50 per share. The company reported a dividend yield of 5 percent. What was the price of the stock?
> In 2011, Pringle Company reported earnings per share of $9.50 when its stock was selling for $228. In 2012, its earnings increased by 13 percent. If all other relationships remain constant, what is the price of the stock?
> Tiana Company reported total assets of $1,400,000 and noncurrent assets of $480,000. The company also reported a current ratio of 3.5. What amount of current liabilities did the company report?
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Cable TV company b. Grocery store c. Accounting firm d. Retail jewelry store Required: Match each company
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Travel agency b. Hotel c. Meat packer d. Drug company Required: Match each company with its financial info
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Retail fur store b. Advertising agency c. Wholesale candy company d. Car manufacturer Required: Match each
> Dollar General Corporation operates general merchandise stores that feature quality merchandise at low prices to meet the needs of middle-, low-, and fixed-income families. All stores are located in the United States, predominantly in small towns in 24 m
> You have just started your first job as a financial analyst for a large stock brokerage company. Your boss, a senior analyst, has finished a detailed report evaluating bonds issued by two different companies. She stopped by your desk and asked for help:
> The following selected financial data pertain to four unidentified companies: This financial information pertains to the following companies: a. Full-line department store b. Wholesale fish company c. Automobile dealer (both new and used cars) d. Resta
> Lowe’s is a leading retailer in the home improvement field. Complete the component percentage analysison the company’s income statement that follows. Discuss any insights provided by this analysis. Consolidated St
> Match each ratio or percentage with its computation. Ratios or Percentages Definitions 1. Profit margin 2. Inventory turnover ratio 3. Average collection period 4. Dividend yield ratio 5. Return on equity A. Net Income (before extraordinary items) +
> Cintas designs, manufactures, and implements corporate identity uniform programs that it rents or sells to customers throughout the United States and Canada. The company’s stock is traded on the NASDAQ and has provided investors with si
> Current assets for London Corporation totaled $410,000 and the current ratio was 2.0. Assume thatthe following transactions were completed: (1) sold $11,000 in merchandise on short-term credit,(2) declared but did not pay dividends of $50,000, (3) paid p
> Sales for the year were $1,000,000, half of which were on credit. The average gross profit rate was 50 percent on sales. Account balances follow: Required: Compute the turnover for the accounts receivable and inventory, the average age of receivables,
> Current assets totaled $100,000 and the current ratio was 1.5. Assume that the following transactions were completed: (1) paid $6,000 for merchandise purchased on short-term credit, (2) purchased a deliverytruck for $11,000 cash, (3) wrote off a bad acco
> Texas Instruments is a global leader in the semiconductor business, providing products to the world’s most innovative electronics companies. Its financial statements reported the following at year-end (in millions): Total assets ........................
> Procter & Gamble is a multinational corporation that manufactures and markets many products that are probably in your home. Last year, sales for the company were $76,476 (all amounts in millions). The annual report did not disclose the amount of cred
> The Bombay Company, Inc., markets a line of proprietary home furnishings that includes large furniture, occasional furniture, wall decor, and decorative accessories that are timeless, classic, and traditional in their styling. Bombay operates through a n
> James Corporation is planning to issue $500,000 worth of bonds that mature in 10 years and pay 6 percent interest each June 30 and December 31. All of the bonds will be sold on January 1, 2011. Required: Compute the issue (sale) price on January 1, 2011
> Current assets totaled $54,000 and the current ratio was 1.5. Assume that the following transactions were completed: (1) purchased merchandise for $7,000 on short-term credit and (2) purchased a delivery truck for $12,000, paid $3,000 cash, and signed a
> In this chapter, we discussed the ROE profit driver (or DuPont model). Using that framework, find the missing amount in each case that follows: Case 1: ROE is 10 percent; net income is $200,000; asset turnover ratio is 5; and net sales are $1,000,000. Wh
> Barton Company requested a sizable loan from First Federal Bank to acquire a large tract of land for future expansion. Barton reported current assets of $1,900,000 ($430,000 in cash) and current liabilities of $1,075,000. First Federal denied the loan re
> Refer to the financial statements of American Eagle Outfitters given in Appendix B at the end of this book. Compute the following ratios for the most recent reporting year for which you have available information: return on equity, earnings per share, pr
> Refer to the financial statements of American Eagle (Appendix B) and Urban Outfitters (AppendixC) and the Industry Ratio Report (Appendix D) at the end of this book. Compute the following ratiosfor the most recent reporting year for which you have availa
> Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. Compute the following ratios for the most recent reporting year for which you have available information: return on equity, earnings per share, profit marg
> You have the opportunity to invest $10,000 in one of two companies from a single industry. The only information you have is shown here. The word high refers to the top third of the industry; average is the middle third; low is the bottom third. Which com
> You have the opportunity to invest $10,000 in one of two companies from a single industry. The only information you have is shown here. The word high refers to the top third of the industry; average is the middle third; low is the bottom third. Which com
> Dell Computers engages in the design, development, manufacture, marketing, sale, and support of variouscomputer systems and services to customers worldwide. It offers desktop computer systems and workstations;mobility products, such as notebook computers
> LaTanya Corporation is planning to issue $100,000, seven-year, 8 percent bonds. Interest is payable eachDecember 31. All of the bonds will be sold on January 1, 2011. Required: Compute the issue (sale) price on January 1, 2011, for each of the following
> The following information was contained in the annual financial statements of Cone Company, whichstarted business January 1, 2011 (assume account balances only in Cash and Capital Stock on this date;all amounts are in thousands of dollars). Required (s
> Richard Company has just prepared the following comparative annual financial statements for 2012: Required (round percentages and ratios to two decimal places): 1. For 2012, compute the tests of ( a ) profitability, ( b ) liquidity, ( c ) solvency, and
> Winter Corporation has just completed its comparative statements for the year ended December 31, 2012. At this point, certain analytical and interpretive procedures are to be undertaken. The completed statements (summarized) are as follows: *Credit sal
> Coke and Pepsi are well-known international brands. Coca-Cola sells more than $13 billion worth of beverages each year while annual sales of PepsiCo products exceed $22 billion. Compare the two companies as a potential investment based on the following r
> Under the indirect method, depreciation expense is added to net income to report cash flows from operating activities. Does depreciation cause an inflow of cash?
> What are the typical cash inflows from financing activities? What are the typical cash outflows from financing activities?
> What are cash equivalents? How are purchases and sales of cash equivalents reported on the statement of cash flows?
> What information does the statement of cash flows report that is not reported on the other required financial statements?
> Compare the purposes of the income statement, the balance sheet, and the statement of cash flows.
> How is the sale of equipment reported on the statement of cash flows using the indirect method?
> Wynn Resorts owns a variety of popular gaming resorts. Its annual report contained the following information: Debenture Conversions Our convertible debentures are currently convertible at each holder’s option into shares of the Company’s common stock at
> On January 1, 2011, Kennedy Corporation issued $1,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 7 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 9 percen
> What are noncash investing and financing activities? Give two examples. How are they reported on the statement of cash flows?
> What are the typical cash inflows from investing activities? What are the typical cash outflows from investing activities?
> Compare the two methods of reporting cash flows from operating activities in the statement of cash flows.
> Explain why a $50,000 increase in inventory during the year must be included in developing cash flows from operating activities under both the direct and indirect methods.
> Explain why cash paid during the period for purchases and for salaries is not specifically reported on the statement of cash flows, indirect method, as cash outflows.
> What are the typical cash inflows from operating activities? What are the typical cash outflows from operating activities?
> What are the major categories of business activities reported on the statement of cash flows? Define each of these activities.
> BG Wholesalers is developing its annual financial statements at December 31, 2013. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statement are summarized: Additional Data: a. Bou
> HiDef Films , Inc., is developing its annual financial statements at December 31, 2012. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statement are summarized as follows: Additi
> Forrest Company is developing its annual financial statements at December 31, 2013. The statements arecomplete except for the statement of cash flows. The completed comparative balance sheets and incomestatement are summarized as follows: Additional Da
> As this book was being written, the business press reported the following information concerning bonds issued by AT&T: Explain the meaning of the reported information. If you bought AT&T bonds with $10,000 face value, how much would you pay (ba
> XS Supply Company is developing its annual financial statements at December 31, 2011. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statement are summarized: Additional Data: a.
> Alpha Company’s accountants have just completed the income statement and balance sheet for the year and have provided the following information (dollars in thousands): Other Data: The company issued $20,000, 8 percent bonds payable du
> Use the information concerning HiDefFilms , Inc., provided in Problem 13-1 to fulfill the following requirements. Required: 1. Prepare the statement of cash flows using the direct method for the year ended December 31, 2012. 2. Based on the cash flow st
> Consider the following: Net income = $10,000, depreciation expense = $2,000, accounts receivable increased by $700, inventory decreased by $400, and accounts payable increased by $300. Based on this information alone, what is cash flow from operating
> If the balance in prepaid expenses has increased during the year, what action should be taken on the statement of cash flows when following the indirect method, and why? a. The change in the account balance should be subtracted from net income because th
> Total cash inflow in the operating section of the statement of cash flows should include which of thefollowing? a. Cash received from customers at the point of sale. b. Cash collections from customer accounts receivable. c. Cash received in advance of re
> In what order do the three sections of the statement of cash flows usually appear when reading fromtop to bottom? a. Financing, Investing, Operating b. Investing, Operating, Financing c. Operating, Financing, Investing d. Operating, Investing, Financin
> The total change in cash as shown near the bottom of the statement of cash flows for the year should agree with which of the following? a. The difference in retained earnings when reviewing the comparative balance sheet. b. Net income or net loss as foun
> Consider the following: Issued common stock for $25,000, sold office equipment for $1,200, paid cash dividends $6,000, purchased investments for $2,000, purchased new equipment for $4,000. What was the net cash inflow (outflow) from investing activities?
> Consider the following: Issued common stock for $25,000, sold office equipment for $1,200, paid cash dividends $6,000, purchased investments for $2,000, paid accounts payable of $4,000. What was the net cash inflow (outflow) from financing activities? a.
> The annual report of American Airlines contained the following note: The Company recorded the issuance of $775 million in bonds (net of $25 million discount) as long-term debt on the consolidated balance sheet. The bonds bear interest at fixed rates, wit
> Which of the following is not added to net income when computing cash flows from operationsunder the indirect method? a. The net increase in accounts payable. b. The net decrease in accounts receivable. c. Depreciation expense reported on the income stat
> Which of the following items would not appear in the financing section of the statement of cashflows? a. The repurchase of the company’s own stock. b. The receipt of dividends. c. The repayment of debt. d. The payment of dividends.
> Which of the following would not appear in the investing section of the statement of cash flows? a. Purchase of inventory. b. Sale of obsolete equipment used in the factory. c. Purchase of land for a new office building. d. All of the above would appear.
> Lion Nathan, brewer of XXXX, Toohey’s, and other well-known Australian brands, has net revenue of more than $2 billion (Australian). Some of the items included in its recent annual consolidated statement of cash flows presented using the direct method ar
> Indicate whether each item would be added ( + ) or subtracted ( − ) in the computation of cash flow from operating activities using the indirect method. 1. Accrued expenses (increase). 2. Inventories (increase).
> MillerCoors Brewing Company is the world’s fifth largest brewer. In the United States, its tie to the magical appeal of the Rocky Mountains is one of its most powerful trademarks. Some of the items included in its recent annual consolidated statement of
> Which of the following transactions qualify as noncash investing and financing activities? Purchase of building with mortgage payable Additional short-term borrowing from bank. Dividends paid in cash Purchase of equipment with short-term investments
> Based on the following information, compute cash flows from financing activities. Purchase of short-term investments ..........................$500 Dividends paid ................................................................900 Interest paid ........
> Based on the following information, compute cash flows from investing activities. Cash collections from customers ........................$550 Sale of used equipment......................................... 250 Depreciation expense .....................
