Test bank managerial accounting by garrison 13e chapter 16

Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
True/False Questions
1. Common-size statements are financial statements of companies of similar size.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
2. One limitation of vertical analysis is that it cannot be used to compare two companies
that are significantly different in size.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
3. The gross margin percentage is computed by dividing the gross margin by total assets.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Medium
4. The sale of used equipment at book value for cash will increase earnings per share.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Medium

5. Earnings per share is computed by dividing net income (after deducting preferred
dividends) by the average number of common shares outstanding.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
6. The dividend payout ratio divided by the dividend yield ratio equals the price-earnings
ratio.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Hard

7. An increase in the number of shares of common stock outstanding will decrease a
company's price-earnings ratio if the market price per share remains unchanged.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Hard

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
8. A company's financial leverage is negative when its return on total assets is less than
its return on common stockholders' equity.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Hard

9. When computing return on common stockholders' equity, retained earnings should be
included as part of common stockholders' equity.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
10. When a retailing company purchases inventory, the book value per share of the
company increases.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 2

AICPA BB: Critical Thinking
Level: Medium

11. If a company's acid-test ratio increases, its current ratio will also increase.
Ans: True AACSB: Analytic
AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking
Level: Medium

12. Assuming a current ratio greater than 1, acquiring land by issuing more of the
company's common stock will increase the current ratio.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking
Level: Medium

13. If a company successfully implements lean production, its inventory turnover ratio
should decrease.
Ans: False AACSB: Analytic
AICPA FN: Reporting LO: 3

AICPA BB: Critical Thinking
Level: Medium

14. Short-term borrowing is not a source of working capital.
Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
15. Working capital is computed by subtracting long-term liabilities from long-term
assets.
Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Multiple Choice Questions
16. Common size financial statements help an analyst to:
A) Evaluate financial statements of companies within a given industry of the
approximate same size.
B) Determine which companies in a similar industry are at approximately the same
stage of development.
C) Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over a period of time or between companies within a given industry
without respect to size.
D) Ascertain the relative potential of companies of similar size in different
industries.
Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted
17. Which of the following ratios would be least useful in determining a company's ability
to pay its expenses and liabilities?
A) current ratio
B) acid-test ratio
C) price-earnings ratio
D) times interest earned ratio

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3,4 Level: Medium
18. Most stockholders would ordinarily be least concerned with which of the following
ratios:
A) earnings per share.
B) dividend yield ratio.
C) price-earnings ratio.
D) acid-test ratio.
Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,3 Level: Easy

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
19. What effect will the issuance of common stock for cash at year-end have on the
following ratios?
Return on Total Assets Debt-to-Equity Ratio
A)
Increase
Increase
B)
Increase
Decrease
C)
Decrease
Increase
D)

Decrease
Decrease
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2,4 Level: Medium
20. 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 priceearnings ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
21. If a company is profitable and is effectively using leverage, which
one of the following ratios is likely to be the largest?
A) Return on total assets.
B) Return on total liabilities.
C) Return on common stockholders' equity.
D) Cannot be determined.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
22. Clark Company issued bonds with an interest rate of 10%. The company's return on
assets is 12%. The company's return on common stockholders' equity would most
likely:
A) increase.
B) decrease.
C) remain unchanged.
D) cannot be determined.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
23. Which of the following transactions could generate positive financial leverage for a
corporation?
A) acquiring assets through the issuance of long-term debt.
B) acquiring assets through the use of accounts payable.
C) acquiring assets through the issuance of common stock.
D) both A and B above
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard
24. Book value per common share is the amount of stockholders' equity per outstanding
share of common stock. Which one of the following statements about book value per
common 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.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy Source: CMA, adapted
25. 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.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3,4 Level: Easy

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
26. A company has just converted a long-term note receivable into a short-term note
receivable. The company's acid-test and current ratios are both greater than 1. This
transaction will:
A) increase the current ratio and decrease the acid-test ratio.
B) increase the current ratio and increase the acid-test ratio.
C) decrease the current ratio and increase the acid-test ratio.
D) decrease the current ratio and decrease the acid-test ratio.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard
27. Broca Corporation has a current ratio of 2.5. Which of the following transactions will
increase Broca's current ratio?
A) the purchase of inventory for cash.
B) the collection of an account receivable.
C) the payment of an account payable.
D) none of the above.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard

28. Allen Company's average collection period for accounts receivable was 25 days in
year 1, but increased to 40 days in year 2. Which of the following would most likely
be the cause of this change:
A) a decrease in accounts receivable relative to sales in year 2.
B) an increase in credit sales in year 2 as compared to year 1.
C) a relaxation of credit policies in year 2.
D) a decrease in accounts receivable in year 2 as compared to year 1.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Hard
29. Wolbers Company wrote off $100,000 in obsolete inventory. The company's inventory
turnover ratio would:
A) increase.
B) decrease.
C) remain unchanged.
D) impossible to determine.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
30. Gottlob Corporation's most recent income statement appears below:
Sales (all on account).................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................

Interest expense..........................................
Net income before taxes.............................
Income taxes..............................................
Net income.................................................

$824,000
477,000
347,000
208,000
139,000
37,000
102,000
30,000
$ 72,000

The gross margin percentage is closest to:
A) 20.7%
B) 72.7%
C) 42.1%
D) 481.9%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 1 Level: Easy
Solution:
Gross margin percentage = Gross margin ÷ Sales = $347,000 ÷ $824,000 = 42.1%
31. Crandall Company's net income last year was $60,000. The company paid preferred
dividends of $10,000 and its average common stockholders' equity was $480,000. The
company's return on common stockholders' equity for the year was closest to:
A) 12.5%
B) 10.4%
C) 2.1%

D) 14.6%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends)
÷ Average common stockholders' equity
= ($60,000 − $10,000) ÷ $480,000 = 10.4%

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
32. Ardor Company's net income last year was $500,000. The company has 150,000
shares of common stock and 30,000 shares of preferred stock outstanding. There was
no change in the number of common or preferred shares outstanding during the year.
The company declared and paid dividends last year of $1.00 per share on the common
stock and $0.70 per share on the preferred stock. The earnings per share of common
stock is closest to:
A) $3.33
B) $3.19
C) $2.33
D) $3.47
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Earnings per share = (Net Income − Preferred Dividends)
÷ Average number of common shares outstanding
= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2]

= $3.19 per share
33. The following information relates to Konbu Corporation for last year:
Price earnings ratio............
Dividend payout ratio........
Earnings per share..............

15
30%
$5

What is Konbu's dividend yield ratio for last year?
A) 1.5%
B) 2.0%
C) 4.5%
D) 10.0%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Dividend yield ratio = Dividends per share* ÷ Market price per share **
= $0.06 ÷ $3 = 2.0%
* Dividends per share = Dividend payout ratio ÷ Earnings per share
= 30% ÷ $5 = $0.06 per share
** Market price per share = Price earnings ratio ÷ Earnings per share

= 15 ÷ $5 = $3 per share
34. Richmond Company has 100,000 shares of $10 par value common stock issued and
outstanding. Total stockholders' equity is $2,800,000 and net income for the year is
$800,000. During the year Richmond paid $3.00 per share in dividends on its common
stock. The market value of Richmond's common stock is $24. What is the priceearnings ratio?
A) 3.0
B) 3.5
C) 4.8
D) 8.0
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*
= $24 ÷ $8 = 3.0
* Earnings per share = (Net income - Preferred dividends) ÷ Average # of common
shares outstanding
= ($800,000 - $0) ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $8 per share
35. Hurst Company has 20,000 shares of common stock outstanding. These shares were
originally issued at a price of $15 per share. The current book value is $25.00 per
share and the current market value is $30.00 per share. The dividends on common
stock for the year totaled $45,000. The dividend yield ratio is:
A) 9%
B) 7.5%
C) 15%
D) 10%
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Dividend yield ratio = Dividends per share ÷ Market price per share
= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%
36. Bramble Company's net income last year was $65,000 and its interest expense was
$15,000. Total assets at the beginning of the year were $620,000 and total assets at the
end of the year were $650,000. The company's income tax rate was 40%. The
company's return on total assets for the year was closest to:
A) 11.7%
B) 10.2%
C) 12.6%
D) 11.2%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $74,000 ÷ $635,000 = 11.7%
*Adjusted net income = Net income + [Interest expense × (1-Tax rate)]
= $65,000 + 15,000 × (1 − 0.40) = $74,000
**Average total assets = ($620,000 + $650,000) ÷ 2 = $635,000
37. Dahl Company can borrow funds at 15% interest. Since the company's tax rate is 40%,
its after-tax cost of interest is only 9%. Thus, the company reasons that if it can earn
$70,000 per year before interest and taxes on a new investment of $500,000, then it
will be better off by $25,000 per year.
A) The company's reasoning is correct.
B) The company's reasoning is not correct, since the after-tax cost of interest would
be 6 percent, rather than 9%.

C) The company's reasoning is not correct, since interest is not tax-deductible.
D) The company's reasoning is not correct, since it would be worse off by $3,000
per year after taxes.
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Hard

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
38. Bucatini Corporation is contemplating the expansion of operations. This expansion
will generate a 11% return on the funds invested. To finance this operation, Bucatini
can either issue 12% bonds, issue 12% preferred stock, or issue common stock.
Bucatini currently has a return on common stockholders' equity of 16%. Bucatini's tax
rate is 30%. In which of the financing options above is positive financial leverage
being generated?
A) none of the options generate positive financial leverage
B) the bonds
C) the common stock
D) the preferred stock
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Medium
39. Consolo Corporation's net income for the most recent year was $809,000. A total of
100,000 shares of common stock and 200,000 shares of preferred stock were
outstanding throughout the year. Dividends on common stock were $2.05 per share
and dividends on preferred stock were $1.80 per share. The earnings per share of
common stock is closest to:
A) $2.44

B) $8.09
C) $4.49
D) $6.04
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Earnings per share = (Net Income - Preferred Dividends)
÷ Average number of common shares outstanding
= [$809,000 − (200,000 × $1.80)] ÷ [(100,000 shares + 100,000 shares) ÷ 2] = $4.49

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
40. Bary Corporation's net income last year was $2,604,000. The dividend on common
stock was $2.50 per share and the dividend on preferred stock was $2.40 per share.
The market price of common stock at the end of the year was $73.50 per share.
Throughout the year, 300,000 shares of common stock and 100,000 shares of preferred
stock were outstanding. The price-earnings ratio is closest to:
A) 9.33
B) 11.89
C) 13.66
D) 8.47
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Price-earnings ratio = Market price per share ÷ Earnings per share*
= $73.50 ÷ $7.88 = 9.33

* Earnings per share = (Net income − Preferred dividends) ÷ Average number of
common shares outstanding
= [$2,604,000 − (100,000 × $2.40)] ÷ [(300,000 shares + 300,000 shares) ÷ 2] = $7.88
41. Arntson Corporation's net income last year was $7,975,000. The dividend on common
stock was $8.20 per share and the dividend on preferred stock was $3.50 per share.
The market price of common stock at the end of the year was $59.10 per share.
Throughout the year, 500,000 shares of common stock and 200,000 shares of preferred
stock were outstanding. The dividend payout ratio is closest to:
A) 1.06
B) 0.51
C) 0.56
D) 1.29
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Dividend payout ratio = Dividends per share ÷ Earnings per share*
= $8.20 ÷ $14.55 = 0.56
* Earnings per share = (Net income − Preferred dividends) ÷ Average number of
common shares outstanding
= [$7,975,000 − (200,000 × $3.50)] ÷ [(500,000 shares + 500,000 shares) ÷ 2] =
$14.55

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
42. Last year, Soley Corporation's dividend on common stock was $11.60 per share and
the dividend on preferred stock was $1.10 per share. The market price of common

stock at the end of the year was $54.80 per share. The dividend yield ratio is closest to:
A) 0.02
B) 0.21
C) 0.23
D) 0.91
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Dividend yield ratio = Dividends per share (see above) ÷ Market price per share
= $11.60 ÷ $54.80 = 0.21
43. Inglish Corporation's most recent income statement appears below:
Sales (all on account).................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Interest expense..........................................
Net income before taxes.............................
Income taxes (30%)...................................
Net income.................................................

$610,000
350,000
260,000
110,000
150,000
30,000
120,000
36,000
$ 84,000

The beginning balance of total assets was $560,000 and the ending balance was
$580,000. The return on total assets is closest to:
A) 18.4%
B) 14.7%
C) 26.3%
D) 21.1%
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
Solution:
Return on total assets = Adjusted net income* ÷ Average total assets**
= $105,000 ÷ $570,000 = 18.4%
*Adjusted net income
= Net income + [Interest expense × (1 − Tax rate)]
= $84,000 + [$30,000 × (1 − 0.30)] = $105,000
**Average total assets = ($560,000 + $580,000) ÷ 2 = $570,000
44. Excerpts from Bellis Corporation's most recent balance sheet appear below:
Preferred stock.................................................
Common stock.................................................
Additional paid-in capital–common stock.......
Retained earnings.............................................
Total stockholders’ equity................................

Year 2
Year 1
$ 100,000 $ 100,000
300,000
300,000
370,000
370,000
480,000
390,000
$1,250,000 $1,160,000

Net income for Year 2 was $160,000. Dividends on common stock were $47,000 in
total and dividends on preferred stock were $23,000 in total. The return on common
stockholders' equity for Year 2 is closest to:
A) 9.4%
B) 13.3%
C) 12.4%
D) 14.5%
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Return on common stockholders' equity = (Net income − Preferred dividends)
÷ Average common stockholders' equity*
= ($160,000 − $23,000) ÷ $1,105,000 = 12.4%
*Average common stockholders' equity = ($1,060,000 + $1,150,000) ÷ 2 = $1,105,000

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
45. Data from Baca Corporation's most recent balance sheet appear below:
Preferred stock.................................................
Common stock.................................................
Additional paid-in capital–common stock.......
Retained earnings.............................................
Total stockholders’ equity................................

$ 100,000
400,000
360,000
580,000
$1,440,000

A total of 400,000 shares of common stock and 20,000 shares of preferred stock were
outstanding at the end of the year. The book value per share is closest to:
A) $3.35
B) $5.00
C) $1.90
D) $3.60
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 2 Level: Easy
Solution:
Book value per share= Common stockholders' equity ÷ Number of common shares
outstanding* = $1,340,000 ÷ 400,000 shares = $3.35 per share
46. Dravis Company's working capital is $10,000 and its current liabilities are $84,000.
The company's current ratio is closest to:
A) 0.88
B) 0.12

C) 9.40
D) 1.12
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Medium
Solution:
Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 =
1.12

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
47. Erascible Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in
accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts receivable,
and inventory. The company's acid-test ratio is closest to:
A) 1.57
B) 0.90
C) 1.33
D) 2.23
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Acid-test ratio = Quick assets* ÷ Current liabilities = $47,000 ÷ $30,000 = 1.57
*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term
notes receivable = $13,000 + $7,000 + $27,000 = $47,000
48. Frame Company had $160,000 in sales on account last year. The beginning accounts
receivable balance was $10,000 and the ending accounts receivable balance was

$16,000. The company's accounts receivable turnover was closest to:
A) 12.31
B) 6.15
C) 16.00
D) 10.00
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =
$160,000 ÷ $13,000 = 12.31
*Average accounts receivable = ($10,000 + $16,000) ÷ 2 = $13,000

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
49. Graber Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $18,000 and the ending accounts receivable balance was
$12,000. The company's average collection period was closest to:
A) 33.69 days
B) 42.12 days
C) 84.23 days
D) 50.54 days
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 days ÷ 8.6667 = 42.12 days

* Accounts receivable turnover = Sales on account ÷ Average accounts receivable
balance
= $130,000 ÷ [($18,000 + $12,000) ÷ 2] = 8.6667
50. Harold Company, a retailer, had cost of goods sold of $260,000 last year. The
beginning inventory balance was $20,000 and the ending inventory balance was
$26,000. The company's inventory turnover was closest to:
A) 5.65
B) 10.00
C) 13.00
D) 11.30
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory*
= $260,000 ÷ $23,000 = 11.30
*Average inventory = ($20,000 + $26,000) ÷ 2 = $23,000

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
51. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
inventory balance was $26,000 and the ending inventory balance was $24,000. The
company's average sale period was closest to:
A) 114.06 days
B) 54.75 days
C) 59.31 days
D) 57.03 days

Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Average sale period = 365 days ÷ Inventory turnover*
= 365 days ÷ 6.4 = 57.03 days
* Inventory turnover = Cost of goods sold ÷ Average inventory
= $160,000 ÷ [($26,000 + $24,000) ÷ 2] = 6.4
52. Raatz Corporation's total current assets are $370,000, its noncurrent assets are
$660,000, its total current liabilities are $220,000, its long-term liabilities are
$410,000, and its stockholders' equity is $400,000. Working capital is:
A) $370,000
B) $150,000
C) $250,000
D) $400,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Working capital = Current assets − Current liabilities = $370,000 − $220,000
= $150,000

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
53. Stubbs Corporation's total current assets are $390,000, its noncurrent assets are
$630,000, its total current liabilities are $230,000, its long-term liabilities are
$290,000, and its stockholders' equity is $500,000. The current ratio is closest to:A)
0.62

A) 0.59
B) 1.70
C) 0.79
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Current ratio = Current assets ÷ Current liabilities = $390,000 ÷ $230,000 = 1.70
54. Data from Hollingworth Corporation's most recent balance sheet appear below:
Cash....................................
Marketable securities.........
Accounts receivable...........
Inventory............................
Prepaid expenses................
Current liabilities...............

$12,000
$29,000
$37,000
$51,000
$20,000
$115,000

The company's acid-test ratio is closest to:
A) 0.85
B) 0.10
C) 0.68
D) 0.36
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $78,000 ÷ $115,000 = 0.68
* Quick assets = Cash + Marketable securities + Accounts receivable
= $12,000 + $29,000 + $37,000 = $78,000

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
55. Eachus Corporation has provided the following data:
Accounts receivable...........
Inventory............................
Sales on account.................
Cost of goods sold..............

This Year Last Year
$135,000 $119,000
$136,000 $155,000
$698,000
$429,000

The accounts receivable turnover for this year is closest to:
A) 0.88
B) 5.50
C) 5.17
D) 1.13
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:

Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =
$698,000 ÷ $127,000 = 5.50
*Average accounts receivable = ($135,000 + $119,000) ÷ 2 = $127,000
56. Data from Millier Corporation's most recent balance sheet and income statement
appear below:
Accounts receivable...........
Inventory............................
Sales on account.................
Cost of goods sold..............

This Year Last Year
$101,000 $125,000
$183,000 $190,000
$758,000
$457,000

The average collection period for this year is closest to:
A) 48.7 days
B) 70.6 days
C) 85.6 days
D) 54.4 days
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis

Solution:
Accounts receivable turnover = Sales on account ÷ Average accounts receivable* =
$758,000 ÷ $113,000 = 6.71
*Average accounts receivable = ($101,000 + $125,000) ÷ 2 = $113,000
Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 ÷ 6.71 = 54.4 days
*See above
57. Laware Corporation has provided the following data:
Accounts receivable...........
Inventory............................
Sales on account.................
Cost of goods sold..............

This Year Last Year
$118,000 $138,000
$180,000 $170,000
$714,000
$447,000

The inventory turnover for this year is closest to:
A) 2.55
B) 0.94
C) 2.48
D) 1.06
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $447,000 ÷ $175,000
= 2.55
*Average inventory = ($170,000 + $180,000) ÷ 2 = $175,000

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
58. Data from Buker Corporation's most recent balance sheet and income statement
appear below:
Accounts receivable...........
Inventory............................
Sales on account.................
Cost of goods sold..............

This Year
$101,000
$155,000
$662,000
$399,000

Last Year
$125,000
$153,000

The average sale period for this year is closest to:
A) 142.0 days
B) 3.6 days
C) 140.9 days
D) 3.7 days
Ans: C AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 3 Level: Easy
Solution:
Inventory turnover = Cost of goods sold ÷ Average inventory* = $399,000 ÷ $154,000
= 2.59
*Average inventory = ($153,000 + $155,000) ÷ 2 = $154,000
Average sale period = 365 days ÷ Inventory turnover* = 365 ÷ 2.59
= 140.9 days
*See above
59. Last year Jar Company had a net income of $290,000, income tax expense of $66,000,
and interest expense of $20,000. The company's times interest earned was closest to:
A) 10.20
B) 14.50
C) 15.50
D) 18.80
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Times interest earned = Net operating income ÷ Interest expense
= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
60. The times interest earned ratio of Whiting Company is 4.0. The interest expense for
the year is $15,000, and the company's tax rate is 30%. Whiting Company's after-tax
net income must be:
A) $60,000

B) $42,000
C) $31,500
D) $16,500
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Hard
Solution:
Times interest earned = Earnings before interest expense and income taxes ÷ Interest
expense
4.0 = (Before-tax income + $15,000) ÷ $15,000
$60,000 = Earnings before income taxes + $15,000
Earnings before income taxes = $45,000
After-tax net income = Earnings before income taxes × (1 − Tax rate)
= $45,000 × (1 − 0.30) = $31,500
61. Karver Company has total assets of $180,000 and total liabilities of $130,000. The
company's debt-to-equity ratio is closest to:
A) 0.28
B) 0.72
C) 0.42
D) 2.60
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= $130,000 ÷ ($180,000 - $130,000) = 2.60

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Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
62. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and
long term liabilities total $200,000. Brewster Company's total assets must be:
A) $375,000
B) $450,000
C) $550,000
D) $675,000
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Hard
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity
= ($100,000 + $200,000) ÷ Stockholders' equity = 0.8
Stockholders' equity = $300,000 ÷ 0.8 = $375,000
Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000
= $675,000
63. Boyington Corporation has provided the following data from its most recent income
statement:
Net operating income.........
Interest expense..................
Net income before taxes.....
Income taxes......................
Net income.........................

$87,000
$49,000
$38,000
$11,000
$27,000

The times interest earned ratio is closest to:

A) 0.55
B) 0.78
C) 2.54
D) 1.78
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Times interest earned = Net operating income ÷ Interest expense
= $87,000 ÷ $49,000 = 1.78

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Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 16 “How Well Am I Doing?”--Financial Statement Analysis
64. Wohlfarth Corporation has provided the following data from its most recent balance
sheet:
Total assets.....................................
Total liabilities................................
Total stockholders’ equity..............

$760,000
$570,000
$190,000

The debt-to-equity ratio is closest to:
A) 4.00
B) 3.00
C) 0.75

D) 0.33
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Reporting LO: 4 Level: Easy
Solution:
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $570,000 ÷ $190,000
= 3.00

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

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