Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 14 Financial Statement Analysis 659

16. Earnings per share: $4.10
    ($245,000$40,000) ÷ 50,000


17. Price-earnings ratio: 6.1
    $25 ÷ $4.10


18. Dividend yield: 3.6%
    $0.90 ÷ $25

b. DuPont formula:

Rate Earned on Total AssetsProfit Margin Asset Turnover

Net Income



Net Income



Net Sales

Average Total Assets Net Sales Average Total Assets

6.9%4.9%1.4

1. What type of analysis is indicated by the following?

Amount Percent

Current assets $100,000 20%

Property, plant, and equipment 400,000 80

Total assets $500,000 100%

A. Vertical analysis

B. Horizontal analysis

C. Profitability analysis

D. Asset efficiency analysis

2. Horizon Company has the following current account
   information for a recent balance sheet:

Cash $ 25,000

Temporary investments 25,000

Accounts receivable 125,000

Merchandise inventory 100,000

Accounts payable 75,000

Accrued expenses 25,000

What are the current and quick ratios?

A. 1.75, 2.50 C. 2.75, 0.50

B. 2.50, 1.50 D. 2.75, 1.75

3. a.What measure is used by stockholders to assess the
   profitability of the firm?
   b.How is the ratio in (a) calculated?


4. a.What measure is used by managers in assessing the
   profitability of the firm?
   b.How is the ratio in (a) calculated?


5. The current year’s amount of net income (after income
   tax) is 15% larger than that of the preceding year. Does
   this indicate an improved operating performance?
   Discuss.


6. How would you respond to a horizontal analysis that
   showed an expense increasing by over 100%?


7. Tiger Equipment Sales Co. had accounts receivable at
   the beginning and end of the year of $200,000 and
   $300,000, respectively. The net sales were $1,000,000.
   Determine the accounts receivable turnover and num-
   ber of days’ sales in accounts receivable.
   A. 3.3, 109 C. 4.0, 109
   B. 3.3, 91 D. 4.0, 91.25


8. The DuPont formula is:
   A. Rate Earned on Total Assets Profit Margin 
   Asset Turnover
   B. Rate Earned on Total Stockholders’ Equity = Rate
   Earned on Total Assets Leverage
   C. Rate Earned on Total Assets Rate Earned on
   Total Stockholders’ Equity Leverage
   D. Rate Earned on Total Assets Profit Margin 
   Leverage


9. A measure useful in evaluating the efficiency in the
   management of inventories is:
   A. working capital ratio.
   B. quick ratio.
   C. number of days’ sales in inventory.
   D. ratio of fixed assets to long-term liabilities.

SELF-STUDY QUESTIONS Answers at end of chapter

DISCUSSION QUESTIONS