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Exam 13: Analyzing Financial Statements

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Question 21

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Negative financial leverage occurs when the:

A) Average net (after tax) interest rate on borrowed funds is less than the company's earnings rate on its assets.
B) Return on assets is more than return on equity.
C) Return on equity is more than return on assets.
D) Operating expenses exceed gross profit.

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Question 22

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A higher current ratio is preferable for companies that do not have predictable cash flows.

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Question 23

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Finding comparable companies in order to compare performance is often difficult since no two companies have identical products, markets, and operating strategies.

The fixed asset turnover ratio increases when net income increases.

The earnings quality ratio increases when net income increases.

The 2016 financial statements of Companies Y and Z showed the following:

Return on equity (ROE) by the Du Pont model provides insight with respect to a company's use of its assets.

Which of the following is false?

Which of the following is not a measure of solvency?

Many companies use high levels of debt to finance their assets because financial leverage benefits are provided to investors when return on assets exceeds the after-tax cost of interest.

Lucas Company has provided the following information: • Cash flow from operating activities, $360,000 • Net income, $306,000 • Interest expense, $30,000 • Interest cash payments, $20,000 • Income tax payments, $240,000 • Income tax expense, $246,000 What was Lucas' cash coverage ratio?

Indicate the effect of each item on the particular ratio of that row of the schedule. In the last column of the schedule, place the answer of the effect of the item on the ratio. Use the letter I for increase in the ratio, D for decrease in the ratio, and N for no effect on the ratio. Each item is independent of the others.

The year-end adjusting entry to record bad debt expense will increase which of the following ratios?

The base amount in preparing component percentages for an income statement is usually which of the following?

Baron Company reported the following data: The current ratio is closest to:

Trenton Company has provided the following information: • Net income, $240,000 • Preferred shares issued, 6,000 • Weighted average number of shares of common stock issued, 24,000 • Cash dividends declared and paid on common stock, $30,000 • Market price per share, $36 • Weighted average number of treasury shares of common stock, 4,000 What is Trenton's price/earnings ratio?

Which of the following statements is correct?

Potaw Company reported the following data at the end of 2016: What was the accounts receivable turnover ratio?

The records of Marshall Company include the following: The return on assets is closest to:

Polk Corporation reported the following information related to its common stock (par $10) outstanding and net income: Required: Calculate each of the following ratios. Round your answers to two decimal places. A.Price/earnings ratio B.Dividend yield