Test bank managerial accounting by garrison 13e chapter 16

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 2.. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Re

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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 BB: Critical Thinking

AICPA FN: Reporting LO: 2 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-earningsratio

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Reporting LO: 2 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 BB: Critical Thinking

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8 A company's financial leverage is negative when its return on total assets is less than its return on common stockholders' equity.

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

11 If a company's acid-test ratio increases, its current ratio will also increase

Ans: True AACSB: Analytic AICPA BB: Critical Thinking

12 Assuming a current ratio greater than 1, acquiring land by issuing more of the

company's common stock will increase the current ratio

13 If a company successfully implements lean production, its inventory turnover ratio should decrease

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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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

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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

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 price-earnings 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

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

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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

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

AICPA FN: Reporting LO: 3,4 Level: Easy

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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

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

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

29 Wolbers Company wrote off $100,000 in obsolete inventory The company's inventoryturnover ratio would:

A) increase

B) decrease

C) remain unchanged

D) impossible to determine

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30 Gottlob Corporation's most recent income statement appears below:

Sales (all on account) $824,000

Cost of goods sold 477,000

Gross margin 347,000

Selling and administrative expense 208,000

Net operating income 139,000

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%

Solution:

Return on common stockholders' equity = (Net income − Preferred dividends)

÷ Average common stockholders' equity

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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

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 15

Dividend payout ratio 30%

Earnings per share $5

What is Konbu's dividend yield ratio for last year?

A) 1.5%

B) 2.0%

C) 4.5%

D) 10.0%

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A) 3.0

B) 3.5

C) 4.8

D) 8.0

AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

= ($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:

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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%

**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

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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

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

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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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 preferredstock were outstanding The price-earnings ratio is closest to:

A) 9.33

B) 11.89

C) 13.66

D) 8.47

Throughout the year, 500,000 shares of common stock and 200,000 shares of preferredstock were outstanding The dividend payout ratio is closest to:

A) 1.06

B) 0.51

C) 0.56

D) 1.29

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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

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) $610,000

Cost of goods sold 350,000

Gross margin 260,000

Selling and administrative expense 110,000

Net operating income 150,000

Interest expense 30,000

Net income before taxes 120,000

Income taxes (30%) 36,000

Net income $ 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%

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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

44 Excerpts from Bellis Corporation's most recent balance sheet appear below:

Year 2 Year 1Preferred stock $ 100,000 $ 100,000

Common stock 300,000 300,000

Additional paid-in capital–common stock 370,000 370,000

Retained earnings 480,000 390,000

Total stockholders’ equity $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%

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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45 Data from Baca Corporation's most recent balance sheet appear below:

Preferred stock $ 100,000

Common stock 400,000

Additional paid-in capital–common stock 360,000

Retained earnings 580,000

Total stockholders’ equity $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

Solution:

Current ratio = Current assets ÷ Current liabilities = ($84,000 + $10,000) ÷ $84,000 = 1.12

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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

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

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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

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

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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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

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

Solution:

Working capital = Current assets − Current liabilities = $370,000 − $220,000

= $150,000

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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

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:

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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55 Eachus Corporation has provided the following data:

This Year Last YearAccounts receivable $135,000 $119,000

Inventory $136,000 $155,000

Sales on account $698,000

Cost of goods sold $429,000

The accounts receivable turnover for this year is closest to:

A) 0.88

B) 5.50

C) 5.17

D) 1.13

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:

Inventory $183,000 $190,000

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

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$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:

Inventory $180,000 $170,000

The inventory turnover for this year is closest to:

A) 2.55

B) 0.94

C) 2.48

D) 1.06

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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58 Data from Buker Corporation's most recent balance sheet and income statement appear below:

Inventory $155,000 $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

B) 14.50

C) 15.50

D) 18.80

Solution:

Times interest earned = Net operating income ÷ Interest expense

= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80

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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

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)

Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $130,000 ÷ ($180,000 - $130,000) = 2.60

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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

Solution:

Times interest earned = Net operating income ÷ Interest expense

= $87,000 ÷ $49,000 = 1.78

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64 Wohlfarth Corporation has provided the following data from its most recent balance sheet:

Total assets $760,000

Total liabilities $570,000

Total stockholders’ equity $190,000

The debt-to-equity ratio is closest to:

A) 4.00

B) 3.00

C) 0.75

D) 0.33

Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity = $570,000 ÷ $190,000

= 3.00

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Use the following to answer questions 65-81:

Gschwend Corporation's most recent balance sheet and income statement appear below:

Statement of Financial PositionDecember 31, Year 2 and Year 1(in thousands of dollars)

Total current assets 560 510

Plant and equipment, net 840 900

Notes payable, short term 60 60

Total current liabilities 270 270

Bonds payable 230 270

Total liabilities 500 540

Stockholders’ equity:

Preferred stock, $100 par value, 5% 200 200

Common stock, $1 par value 100 100

Additional paid-in capital–common stock 100 100

Retained earnings 500 470

Total stockholders’ equity 900 870

Total liabilities & stockholders’ equity $1,400 $1,410

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Income StatementFor the Year Ended December 31, Year 2

(in thousands of dollars)Sales (all on account) $1,370

Cost of goods sold 800

Gross margin 570

Selling and administrative expense 439

Net operating income 131

65 The gross margin percentage for Year 2 is closest to:

A) 814.3%

B) 71.3%

C) 41.6%

D) 12.3%

Solution:

Gross margin percentage = Gross margin ÷ Sales = $570 ÷ $1,370 = 41.6%

66 The earnings per share of common stock for Year 2 is closest to:

A) $0.60

B) $0.70

C) $1.00

D) $1.31

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Earnings per share = (Net Income - Preferred Dividends) ÷

Average number of common shares outstanding* = ($70 − $10) ÷ 100 = $0.60

*Number of common shares outstanding = Common stock ÷ Par value

Solution:

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= $100 ÷ $1 = 100

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

= $0.30 ÷ $0.60 = 50.0%

*Dividends per share = Common dividends ÷ Common shares

= $30 ÷ 100 shares = $0.30 per share

69 The dividend yield ratio for Year 2 is closest to:

A) 75.00%

B) 8.23%

C) 2.06%

D) 6.17%

Solution:

Earnings per share = (Net Income − Preferred Dividends) ÷

= $100 ÷ $1 = 100

= $0.30 ÷ $0.60 = 50.0%

= $30 ÷ 100 shares = $0.30 per share

Dividend yield ratio = Dividends per share ÷ Market price per share = $0.30 ÷ $4.86 =6.17%

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70 The return on total assets for Year 2 is closest to:

A) 5.00%

B) 6.55%

C) 6.53%

D) 4.98%

Solution:

= $91.70 ÷ $1,405 = 6.53%

= $70 + [$31 × (1 − 0.30)] = $91.70

71 The return on common stockholders' equity for Year 2 is closest to:

A) 6.78%

B) 7.91%

C) 8.76%

D) 10.22%

Solution:

Return on common stockholders' equity

= (Net income - Preferred dividends) ÷ Average common stockholders' equity*

= ($70 − $10) ÷ $685 = 8.76%

*Average common stockholders' equity

= [($870 - $200) + ($900 − $200)] ÷ 2 = $685

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72 The book value per share at the end of Year 2 is closest to:

A) $0.60

B) $7.00

C) $9.00

D) $14.00

Solution:

Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $700 ÷ 100 shares = $7.00 per share

= $100 ÷ $1 per share = 100 shares

73 The working capital at the end of Year 2 is:

A) $840 thousand

B) $560 thousand

C) $290 thousand

D) $900 thousand

Solution:

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75 The acid-test ratio at the end of Year 2 is closest to:

A) 1.11

B) 1.12

C) 2.07

D) 1.44

Solution:

Acid-test ratio = Quick assets* ÷ Current liabilities = $300 ÷ $270 = 1.11

*Quick assets = Cash + Marketable securities + Accounts receivable + Short-term notes receivable = $140 + $0 + $160 = $300

76 The accounts receivable turnover for Year 2 is closest to:

A) 1.14

B) 8.56

C) 0.88

D) 9.13

Solution:

$1,370 ÷ $150 = 9.13

*Average accounts receivable = ($140 + $160) ÷ 2 = $150

77 The average collection period for Year 2 is closest to:

A) 1.1 days

B) 42.6 days

C) 0.9 days

D) 40.0 days

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$1,370 ÷ $150 = 9.13

*Average accounts receivable = ($140 + $160) ÷ 2 = $150

Average collection period = 365 days ÷ Accounts receivable turnover

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80 The times interest earned for Year 2 is closest to:

A) 4.23

B) 6.04

C) 2.26

D) 3.23

Solution:

Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= $500 ÷ $900 = 0.56

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Orgeron Corporation's most recent balance sheet and income statement appear below:

Statement of Financial PositionDecember 31, Year 2 and Year 1(in thousands of dollars)

Total current assets 660 540

Plant and equipment, net 680 750

Notes payable, short term 80 90

Total current liabilities 290 280

Bonds payable 290 300

Total liabilities 580 580

Stockholders’ equity:

Preferred stock, $100 par value, 5% 100 100

Common stock, $2 par value 200 200

Additional paid-in capital–common stock 100 100

Retained earnings 360 310

Total stockholders’ equity 760 710

Total liabilities & stockholders’ equity $1,340 $1,290

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Income StatementFor the Year Ended December 31, Year 2

(in thousands of dollars)Sales (all on account) $1,260

Cost of goods sold 800

Gross margin 460

Selling and administrative expense 272

Net operating income 188

82 The gross margin percentage for Year 2 is closest to:

A) 57.5%

B) 22.8%

C) 438.1%

D) 36.5%

Solution:

Gross margin percentage = Gross margin ÷ Sales = $460 ÷ $1,260 = 36.5%

83 The earnings per share of common stock for Year 2 is closest to:

A) $1.05

B) $1.88

C) $1.50

D) $1.00

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÷ Average number of common shares outstanding*

= ($105 − $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share

84 The price-earnings ratio for Year 2 is closest to:

A) 11.30

B) 10.76

C) 7.53

D) 6.01

Solution:

Earnings per share = (Net Income - Preferred Dividends)

= ($105 - $5) ÷ (100 shares + 100 shares)/2 = $1.00 per share

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

= $11.30 ÷ $1.00 = 11.30

Trang 38

85 The dividend payout ratio for Year 2 is closest to:

A) 47.6%

B) 55.0%

C) 50.0%

D) 500.0%

Solution:

= $0.50 ÷ $1.00 = 50.0%

= $50 ÷ 100 shares = $0.50 per share

86 The dividend yield ratio for Year 2 is closest to:

A) 4.42%

B) 0.45%

C) 90.91%

D) 4.87%

Solution:

= $0.50 ÷ $1.00 = 50.0%

= $50 ÷ 100 shares = $0.50 per share

Dividend yield ratio = Dividends per share ÷ Market price per share = $0.50 ÷ $11.30

= 4.42%

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87 The return on total assets for Year 2 is closest to:

A) 10.01%

B) 7.98%

C) 7.84%

D) 9.82%

Solution:

= $131.60 ÷ $1,315 = 10.01%

= $105 + [$38 × (1 − 0.30)] = $131.60

88 The return on common stockholders' equity for Year 2 is closest to:

A) 15.75%

B) 16.54%

C) 13.61%

D) 14.29%

Solution:

Return on common stockholders' equity

= (Net income − Preferred dividends) ÷ Average common stockholders' equity*

= ($105 − $5) ÷ $635 = 15.75%

*Average common stockholders' equity = ($610 + $660) ÷ 2 = $635

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89 The book value per share at the end of Year 2 is closest to:

A) $1.00

B) $7.60

C) $13.40

D) $6.60

Solution:

Book value per share = Common stockholders' equity

÷ Number of common shares outstanding* = $660 ÷ 100 shares = $6.60 per share

Payne Company's sales and current assets have been reported as follows over the last four years:

Year 4 Year 3 Year 2 Year 1Sales $810,000 $720,000 $630,000 $600,000

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