ACCT 101 Lecture Notes - Lecture 2: Cash Flow, Current Liability, Financial Statement

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23 Aug 2016

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Ratio analysis: analyze the financial information of the company by comparing one number to another number. Working capital: measures difference (in $) between current assets and current liabilities [ = curr assets curr liab ] generally, the higher the better. Current ratio: measures ability to pay short term debt. [ current assets / current liabilities = x times or as % ] the answer means current assets are x times greater than current liabilities generally, the higher the better see class ex. Earnings per share (eps) required by gaap and on financial statement by sec (net income total preferred dividends) weighted avg. common shares outstanding. Eps is the amount of profit a corporation earned for each share of stock. Reported at the bottom of income statement. Higher the profit the better for the ratio. Used to compare performance of different companies (and one specific company over a period of time)

Related Questions

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

Complete one paragraph, profiling each company's business, including information such as brief histories, where each company is located, number of employees, the products each company sells, and so forth. Please reference any websites that you used for the profiles on the Bibliography tab.

Tootsie Roll Industries began in a small candy store in New York in 1896. Tootsie Roll is now headquartered in Chicago and primarily sells its products in the United States, Canada, and Mexico. According to Yahoo! Finance, Tootsie Roll has 2,000 full-time employees. Tootsie Roll sells the following branded candy: Tootsie Roll, Tootsie Roll Pop, Charms Blow Pop, Mason Dots, Andes, Sugar Daddy, Charleston Chew, Double Bubble, Razzles, Caramel Apple Pop, and Junior Mints. Tootsie Roll had 2014 net product sales of $539.9 million.

Hershey Company was founded by Milton S. Hershey in 1893 and is headquartered in Hershey, Pennsylvania. According to Yahoo! Finance, Hershey has 20,800 full-time employees. Hershey is famous for Good & Plenty, Hershey Bar, Hershey's Kisses, Hershey's Bliss, Reese's, Rolo, Twizzlers, Almond Joy, Kit Kat, and Ice Breakers. Hershey had net product sales of $7.4 billion for 2014.

Tootsie Roll			Hershey			Interpretation and comparison between the two companies' ratios (reading Chapter 13 will help you prepare the commentary)
						The comparison of the ratios is an important part of the project. A good approach is to briefly explain what the ratio tells us. Indicate whether a higher or lower ratio is better. Then compare the two companies on this basis. Remember that each ratio below requires a comparison.
		$ 1.05			$ 3.91


$264,621	=	4.11	$2,247,047	=	1.16
$64,459			$1,935,647


$198,962	=	36.9%	$3,336,166	=	45.0%
$539,895			$7,421,768


$63,298	=	11.7%	$846,912	=	11.4%
$539,895			$7,421,768


$340,933		5.2	$4,085,602		5.6
$66,118		times	$730,289		times


365	=	71	365	=	65
5.2		days	5.6		days


$539,895	=	12.9	$7,421,768	=	13.8
$41,987			$537,426

365	=	28.4	365	=	26.4
12.9		days	13.8		days


$539,895	=	0.60	$7,421,768	=	1.35
$899,398			$5,493,502


	=	7.0%		=	15.4%



$219,250	=	24.1%	$4,109,986	=	73.0%
$910,386			$5,629,516


$83,923	=	847.7	1,389,575	=	16.6
$99			83,532


$0.36	=	1.1%	$2.33	=	2.6%
$32.04			$90.32

$63,298	=	9.2%	$846,912	=	54.0%
$685,721			$1,567,791


	=	$78,065			$ 492,274
		$78,065		=


$30.65	=	29	$103.93	=	27
$1.05			$3.91

You all get the chance to play the role of financial analyst below. The summary should be a comparison of each company's performance for each major category of ratios listed below. Focus on major differences as you compare each company's performance. A nice way to conclude is to state which company you feel is the better investment and why.

Measuring Ability to Pay Current Liabilities: Tootsie Roll has the advantage for the current ratio. Tootsie Roll has $4.11 in current assets for every dollar in current liabilities, while Hershey has only $1.16 in current assets for every dollar in current liabilities.

Measuring Turnover: Hershey has the advantage for the inventory turnover and accounts receivable turnover ratios. Hershey turns over its inventory 5.6 times to Tootsie Roll's 5.2 times, and Hershey turns over its accounts receivable 13.8 times to Tootsie Roll's 12.9 times.

Measuring Leverage - Overall Ability to Pay Debts: Tootsie Roll has significantly less debt than Hershey as evidenced by Tootsie Roll's 24.1% debt-to-asset ratio as compared to Hershey's 73% debt-to-asset ratio. Tootsie Roll can cover its interest expense 847.7 times with income before interest and taxes, while Hershey can only cover its interest expense 16.6 times with their income before interest and taxes. Tootsie Roll has the advantage for each of these ratios.

Measuring Profitability: Hershey has the advantage for 4 of the 5 profitability ratios. Hershey has a significant edge in return on common stockholders' equity, with a 54% return on common stockholders' equity, as compared to Tootsie Roll's 9.2% return on common stockholders' equity. Hershey has a higher gross profit rate (45.0%â36.9%), while Tootise Roll has a higher net profit margin ratio (11.7%â11.4%). Hershey also has a significant advantage for asset turnover (1.35â.60) and rate of return on total assets (15.4%â7.0%).

Analyzing stock as an investment: Hershey returns a 2.6% dividend yield to its investors, while Tootsie Roll's yield is 1.1%. Hershey has positive free-cash flow of $492.2 million, whereas Tootsie Roll has positive free-cash flow of $78.1 million. Free-cash flow can be used to undertake acquisitions, pay additional dividends, pay down debt, or buy back stock.

Conclusion: Tootsie Roll is the safer investment when you examine the ability to pay current liabilities and overall liabilities, but Hershey has the advantage for the turnover and profitability ratios. For the conservative investor, Tootsie Roll looks like the way to go because of its strong current and times interestâearned ratios. For the growth-oriented investor, Hershey is the way to go because of its stronger profitability ratios and large amount of free-cash flow.

1. Which of thefollowing below generally is the most useful in analyzing companiesof different sizes

a.	comparative statements
b.	common-sized financialstatements
c.	price-level accounting
d.	audit report

2. What type ofanalysis is indicated by the following?

			Increase(Decrease*)
	2010	2009	Amount	Percent
Current assets	$ 380,000	$ 500,000	$120,000*	24%*
Fixed assets	1,680,000	1,500,000	180,000	12%

a.	vertical analysis
b.	horizontalanalysis
c.	liquidity analysis
d.	common-size analysis

3. Assume thefollowing sales data for a company:

	2010	750,000
	2009	500,000

What is the percentage increase in sales from 2009 to 2010?

a.	25%
b.	66.7%
c.	50% 250,000/500,000 = .5 or 50%
d.	150%

4. In performing avertical analysis, the base for cost of goods sold is

a.	Total selling expenses.
b.	Net sales.
c.	Total expenses.
d.	Total revenues.

5. The ability of abusiness to pay its debts as they come due and to earn a reasonableamount of income is referred to as

a.	solvency and leverage
b.	solvency and profitability
c.	solvency andliquidity
d.	solvency and equity

6. Which of thefollowing is not an analysis usedin assessing solvency?

a.	number of times interest charges are earned
b.	current position analysis
c.	ratio of net sales toassets
d.	inventory analysis

7. A company withworking capital of $500,000 and a current ratio of 2.5 pays a$85,000 short-term liability. The amount of working capitalimmediately after payment is

a.	$585,000
b.	$415,000
c.	$500,000
d.	$85,000

8. Based on thefollowing data for the current year, what is the accountsreceivable turnover?

Net sales on account during year	$500,000
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.	12.5 =$500,000/ 40000 = 12.5 (45,000+35,000)/2 =40,000
b.	11.1
c.	10.0
d.	14.3

9. Based on thefollowing data for the current year, what is the inventoryturnover?

Net sales on account during year	$500,000
Cost of merchandise sold during year	330,000
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.	3.3 $330,000 /100,000 =3.3
b.	8.3
c.	3.7
d.	3.0

10. The primary advantages of theaverage rate of return method are its ease of computation and thefact that:

a.	it is especially useful to managers whose primary concern isliquidity
b.	there is less possibility of loss from changes in economicconditions and obsolescence when the commitment is short-term
c.	it emphasizes the amountof income earned over the life of the proposal
d.	rankings of proposals are necessary

11. The expected average rate ofreturn for a proposed investment of $800,000 in a fixed asset, witha useful life of four years, straight-line depreciation, noresidual value, and an expected total net income of $240,000 forthe 4 years, is:

a.	30%
b.	15%
c.	60%
d.	7.5%

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ACCT 101 Lecture Notes - Lecture 2: Cash Flow, Current Liability, Financial Statement

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