Question: On January 1, 2011, Clearwater Corporation sold

> A bond with a face value of $100,000 is sold on January 1. The bond has a stated interest rate of 10 percent and matures in 10 years. When the bond was issued the market rate of interest was 10 percent. On December 31, the market rate of interest increas

> When using the effective-interest method of amortization, interest expense reported in the income statement is impacted by the a. Par value of the bonds. b. Coupon rate of interest stated in the bond certificate. c. Market rate of interest on the date th

> To determine whether a bond will be sold at a premium, discount, or at face value, one must know which of the following pairs of information? a. Par value and the coupon rate on the date the bond was issued. b. Par value and the market rate on the date t

> A bond with a face value of $100,000 was issued for $93,500 on January 1, 2011. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interestis paid annually. How much interest will be paid on D

> Which of the following is false when a bond is issued at a premium? a. The bond will issue for an amount above its par value. b. Bonds payable will be credited for the par value of the bond. c. Interest expense will exceed the cash interest payments. d.

> Which account would not be included in the debt-to-equity ratio calculation? a. Unearned Revenue. b. Retained Earnings. c. Income Taxes Payable. d. All of the above are included.

> On January 1, 2011, Grand Isle Corporation issued $900,000 in bonds that mature in five years. The bonds have a stated interest rate of 10 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 9 perc

> For each of the following items, specify whether the information would be found in the balance sheet, the income statement, the statement of cash flows, the notes to the statements, or not at all. 1. The amount of a bond liability. 2. Interest expense fo

> In what section of the statement of cash flows would you find cash paid to retire bonds? In what section would you find cash paid for interest?

> If interest rates fell after the issuance of a bond and the company decided to retire the debt, would you expect the company to report a gain or loss on debt retirement? Describe the financial statement effects of a debt retirement under these circumstan

> Wefald Company issued $600,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for $580,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on June

> Coffman Company issued $1,000,000, 10-year, 10 percent bonds on January 1, 2011. The bonds sold for $940,000. Interest is payable semiannually each June 30 and December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on J

> Trew Company plans to issue $900,000, 10-year, 6 percent bonds. Interest is payable semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds assuming a market yield of 8.5 percen

> Willams Company plans to issue $600,000, 10-year bonds that pay 8 percent payable semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance priceof the bonds assuming a market yield of 8 percent.

> If a company issues a bond at a discount, will interest expense each period be more or less than the cash payment for interest? If another company issues a bond at a premium, will interest expense be more or less than the cash payment for interest? Is yo

> The debt-to-equity and times interest earned ratios were discussed in this chapter. Which is a better indicator of a company’s ability to meet its required interest payment? Explain.

> RKO Company issued $850,000, 10-year, 8 percent bonds on January 1, 2011. The bonds sold for $910,000. Interest is payable annually each December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on December 31, 2011, using

> On January 1, 2011, Avaya Corporation issued $2,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 6 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 7 percent.

> Ernst Company issued $600,000, 10-year, 9 percent bonds on January 1, 2011. The bonds sold for $620,000. Interest is payable annually each December 31. Record the sale of the bonds on January 1, 2011, and the payment of interest on December 31, 2011, usi

> Waterhouse Company plans to issue $500,000, 10-year, 10 percent bonds. Interest is paid semiannually on June 30 and December 31. All of the bonds will be sold on January 1, 2011. Determine the issuance price of the bonds, assuming a market yield of 8 per

> What are some of the primary items on financial statements about which creditors usually are concerned?

> What is ratio analysis? Why is it useful?

> Why are statement users interested in financial summaries covering several years? What is the primary limitation of long-term summaries?

> What is the primary purpose of comparative financial statements?

> Why are the notes to the financial statements important to decision makers?

> Identify two factors that limit the effectiveness of ratio analysis.

> What are market tests?

> A number of events over the life of a bond have effects that are reported on the statement of cash flows. For each of the following events, determine whether the event affects the statement of cash flows. If so, describe the impact and specify where on t

> What does the debt-to-equity ratio reflect?

> Compare and contrast the current ratio and the quick ratio.

> Is profit margin a useful measure of profitability? Explain.

> What is financial leverage? How is it measured as a percentage?

> Explain the two concepts of return on investment.

> What are component percentages? Why are they useful?

> The 2012 financial statements for the Price and Waterhouse companies are summarized here: The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years, and ea

> Sears, Roebuck and JCPenney are two giants of the retail industry. Both offer full lines of moderately priced merchandise. Annual sales for Sears total $53 billion. JCPenney is smaller, with $20 billion in revenues. Compare the two companies as a potenti

> 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.

> 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

> 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

> 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?