ACCTG 101 Lecture Notes - Lecture 25: Market Analysis, Profit Margin, Preferred Stock

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14 Sep 2020

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Claims against the total assets of a business are divided into two groups: (1) claims of creditors and (2) claims of owners. The relationship between the total claims of the creditors and owners the ratio of liabilities to stockholders" equity. Is a solvency measure that indicates the margin of safety for creditors. It also indicates the ability of the business to withstand adverse business conditions. When the claims of creditors are large in relation to the equity of the stockholders, there are usually significant interest payments. If earnings decline to the point where the company is unable to meet its interest payments, the business may be taken over by the creditors. Grand company"s balance sheet shows that the major factor explaining the change in the ratio was the ,000 increase in long-term liabilities during 20x2. The ratio at the end of both years shows a large margin of safety for the creditors.

Related Questions

1. Creditors' claims on the assets of a company are called: (Points : 2)

2. The primary objective of financial accounting is: (Points : 2)

To serve the decision-making needs of internal users

To provide financial statements to help external users analyze and interpret an organization's activities

To monitor and control company activitiesTo provide information on both the costs and benefits of managing products and services

To know what, when and how muchto produce

3. Assets created by selling goods and services on credit are: (Points : 2)

4. The debt ratio is used: (Points : 2)

To measure the amount of equity relative to the expenses

To reflect the risk associated with a company's debts

Only by banks when a business applies for a loan

To determine how much debt a firm should pay off

5. Net Income: (Points : 2)

Decreases equity

Represents the amount of assets owners put into a business

Equals assets minus liabilities

Is the excess of revenues over expenses

Represents the owners' claims against assets

6. Internal users of accounting information include: (Points : 2)

Shareholders

Customers

Creditors

Government regulators

Line Supervisor

7. Risk is: (Points : 2)

Net income divided by average total assets

The reward for investment

The uncertainty about the expected return that will be earned from an investment

Unrelated to expected return

8. An example of an operating activity is: (Points : 2)

Paying wages

Purchasing office equipment

Borrowing money from a bank

Selling stock

Paying off a loan

9. Which accounting assumption assumes that all accounting information is reported monthly or yearly? (Points : 2)

Business entity assumption

Monetary unit assumption

Value assumption

Cost assumption

Time period assumption

10. Distributions of assets by a business to its stockholders are called: (Points : 2)

Chapter 12âFinancial Statement Analysis (10points)

MUMULTIPLECHOICE

1. 1. The relationship of $325,000to $125,000, expressed as a ratio, is

a.	2.0 to 1
b.	2.6 to 1
c.	2.5 to 1
d.	0.45 to 1

2. In a common size income statement,the 100% figure is:

a.	net cost of goods sold.
b.	net income.
c.	gross profit.
d.	net sales.

3. Based on the following data for thecurrent year, what is the number of days' sales in accountsreceivable?

Net sales on account during year	$584,000
Cost of merchandise sold during year	300,000
Accounts receivable, beginning of year	45,000
Accounts receivable, end of year	35,000
Inventory, beginning of year	90,000
Inventory, end of year	110,000

a.	7.3
b.	2.5
c.	14.6
d.	25

4. Based on the following data for thecurrent year, what is the number of days' sales in inventory?

Net sales on account during year	$1,204,500
Cost of merchandise sold during year	657,000
Accounts receivable, beginning of year	75,000
Accounts receivable, end of year	85,000
Inventory, beginning of year	85,600
Inventory, end of year	98,600

a.	51.2
b.	44.4
c.	6.5
d.	7.5

5. The number of times interest expenseis earned is computed as

a.	net income plus interest expense, divided by interestexpense
b.	income before income tax plus interest expense, divided byinterest expense
c.	net income divided by interest expense
d.	income before income tax divided by interest expense

6. The current ratio is

a.	used to evaluate a company's liquidity and short-term debtpaying ability.
b.	is a solvency measure that indicated the margin of safety of anoteholder or bondholder.
c.	calculated by dividing current liabilities by currentassets.
d.	calculated by subtracting current liabilities from currentassets.

7. A company with $70,000 in current assets and $50,000 incurrent liabilities pays a $1,000 current liability. As a result ofthis transaction, the current ratio and working capital will

a.	both decrease.
b.	both increase.
c.	increase and remain the same,respectively.
d.	remain the same and decrease,respectively.

8. Hsu Company reported the following onits income statement:

	Income before income taxes	$420,000
	Income tax expense	120,000
	Net income	$300,000

An analysis of the income statement revealed that interestexpense was $80,000. Hsu Company's times interest earned was

a.	8 times.
b.	6.25 times.
c.	5.25 times.
d. e.	5 times. None of the above

9. The following information pertains toBrock Company. Assume that all balance sheet amounts represent bothaverage and ending balance figures. Assume that all sales were oncredit.

Assets

Cash and short-term investments		$ 40,000
Accounts receivable (net)		30,000
Inventory		25,000
Property, plant and equipment		215,000
	Total Assets	$310,000

Liabilities and Stockholdersâ Equity

Current liabilities		$ 60,000
Long-term liabilities		95,000
Stockholdersâ equity-common		155,000
	Total Liabilities and stockholdersâ equity	$310,000

Income Statement

Sales		$ 90,000
Cost of goods sold		45,000
Gross margin		45,000
Operating expenses		20,000
	Net income	$ 25,000

Number of shares of common stock	6,000
Market price of common stock	$20

What is the current ratio for thiscompany?

a.	1.42
b.	0.78
c.	1.58
d. e	0.67 None of the above

11. Basedon the above data, what is the amount of quick assets?

a.	$168,000
b.	$96,000
c.	$60,000
d. e	$61,000 None of the above

12. Basedon the above data, what is the amount of working capital?

a.	$213,000
b.	$113,000
c.	$153,000
d. e	$39,000 None of the above

13. Thetendency of the rate earned on stockholders' equity to varydisproportionately from the rate earned on total assets issometimes referred to as

a.	leverage
b.	solvency
c.	yield
d.	quick assets

The balance sheets at the end of each of the first two years ofoperations indicate the following:

	2012	2011
Total current assets	$600,000	$560,000
Total investments	60,000	40,000
Total property, plant, and equipment	900,000	700,000
Total current liabilities	125,000	65,000
Total long-term liabilities	350,000	250,000
Preferred 9% stock, $100 par	100,000	100,000
Common stock, $10 par	600,000	600,000
Paid-in capital in excess of par-common stock	75,000	75,000
Retained earnings	310,000	210,000

14. Ifnet income is $115,000 and interest expense is $30,000 for 2012what is the rate earned on total assets for 2012 (round percent toone decimal point)?

a.	9.3%
b.	10.1%
c.	8.0%
d. e.	7.4% None of the above

15. Ifnet income is $115,000 and interest expense is $30,000 for 2012,what is the rate earned on stockholders' equity for 2012 (roundpercent to one decimal point)?

a.	10.6%
b.	11.1%
c.	12.4%
d. e.	14.0% None of the above

16. Ifnet income is $115,000 and interest expense is $30,000 for 2012,what are the earnings per share on common stock for 2012, (round totwo decimal places)?

a.	$2.07
b.	$1.92
c.	$1.77
d. e.	$1.64 None of the above

17. Theparticular analytical measures chosen to analyze a company may beinfluenced by all of the following except:

a.	industry type
b.	capital structure
c.	diversity of business operations
d.	product quality or service effectiveness

18. In2012 Robert Corporation had net income of $250,000 and paiddividends to common stockholders of $50,000. They had 50,000 sharesof common stock outstanding during the entire year. RobertCorporation's common stock is selling for $50 per share on the NewYork Stock Exchange.

Robert Corporation's price-earnings ratio is

a.	10 times.
b.	5 times.
c.	2 times.
d. e.	8 times. None of the above

19. Leveraging implies that a company

a.	contains debt financing.
b.	contains equity financing.
c.	has a high current ratio.
d.	has a high earnings per share.

20. Percentage analyses, ratios, turnovers, and other measures offinancial position and operating results are

a.	a substitute for sound judgment.
b.	useful analytical measures.
c.	enough information for analysis, industry information is notneeded.
d.	unnecessary for analysis, but reaction is better.

salmonlocust980

AECO 3430 Lab Work #5 Understanding Morgan Cattle's FinancialStatements 1 (20pts) How does opening a $125,000 line of creditwith Farm Credit immediately affect the Balance Sheet? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsof the balance sheet demonstrate this. 2 (20pts) How can a businessfail while showing accrual profits? Which financial statement(s)are needed to demonstrate the answer? Specifically demonstrate(with hypothetical numbers) how the relevant sections demonstratethis. 3 (20pts) What does it mean for a business to show a decreasein Retained Earnings? Which financial statement(s) are needed todemonstrate the answer? Specifically demonstrate (with hypotheticalnumbers) how the relevant sections demonstrate this. 4 (20pts) Howdoes buying more assets immediately affect equity? Which financialstatement(s) are needed to demonstrate the answer? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsdemonstrate this. 5 (20pts) How does making a final payment of$45,000 with 5% interest on an equipment loan affect equity? Whichfinancial statement(s) are needed to demonstrate the answer?Specifically demonstrate (with hypothetical numbers) how therelevant sections demonstrate this. 6 (10pts) What did you learnfrom this lab exercise?

1.) If you were to take a $150,000 line of credit through FarmCredit your liabilities and cash would automatically increase onthe balance sheet. Hypothetically speaking if your cash account had$100,000 and your total assets were $1,000,000 prior to taking outthe line of credit, your total assets would increase to $1,150,000and your cash account would increase to $250,000. If you alreadyhad $100,000 in notes payable, after accepting the line of creditthat account would increase to $250,000. With these increases thebalance sheet should still balance out if done correctly.

2.) An income statement could show a net profit but still notreflect the actual financial soundness of a business. Incomestatements show revenue and expenses but do not show the amount ofcash on hand and/or other liquid assets. Making it where it couldnot accurately represent the businesses ability to pay a loan back.It could read a net income of $450,000 but the balance sheet couldread that there is only $100,000 in cash and $250,000 inliabilities. To get an adequate representation of the businessesactual financial standing multiple financial statements must beused.

3.) Retained earnings show the relation between the balancesheet and income statement, events that cause net loss in cash flowwill decrease retained earnings. This is usually the result ofoperating costs/expenses. A decrease in retained earnings representa decrease in owners equity on the balance sheet, this is a resultfrom an increase in expenses. These relates to problem 1 somewhat.If you were to take out a loan of $200,000 and your cash was at$300,000 it would increase to $500,000. Subsequently your notespayable would increase by $200,000 as well. The accounts wouldbalance out in the end the same because they increased the same.However the interest expense would increase causing net farmincrease to decrease. The retained earnings would decrease as aresult of notes payable increasing.

4.) If the assets were purchased using cash your current assetswould increase and cash account would decrease because it waspurchased immediately with cash. If a new truck was purchased for$65,000 dollars your cash would decrease by that amount and yourcurrent assets account would increase by the same amount. If theasset was purchased at market value it doesnât affect your equity,because nothing was gained or loss in the acquisition of thetruck.

5.) A final payment of $35,000 with 5% interest would decreasecash on the balance sheet and also decrease liabilities. Theinterest payments would increase and the farms net income woulddecrease on income statement. Statement of owners equity would showan increase on retained earnings amount.

6.) On this lab exercise I learned to show with words the thingswe have learned in class. I learned how to put into words thechanges we see in financial statements and how they affect theoutlook on a business. To me it makes more sense to see it in aword explanation than it does to look at it on paper. I feel like Ihave a better understanding of what is going on when it is inwritten form as opposed to when it is on a spreadsheet surroundedby other numbers where I get lost in it all. When it is in words Ithink it is easier to take that and go back to the financialstatement and really see it. I think this is an important part offinancial management whether you are the accountant or the businessowner. It is important to be able to understand financial recordsand how they affect your business or the person you are workingfor. Either way it is necessary to know somewhat of both sides tounderstand it fully.

I just need these answers worded different.

ACCTG 101 Lecture Notes - Lecture 25: Market Analysis, Profit Margin, Preferred Stock

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