Ratios - Profitability and Equity Flashcards
Ratios - Profitability and Equity
List the per share common stock dividend pay out rate formula.
Measures the price of a share of common stock relative to its latest earnings per share. Indicates a measure of how the market values the stock, especially when compared with other stocks.
Cash Dividends per Common Share / Earnings Per Share (EPS).
What do equity/investment leverage ratios measure?
Measure relative sources of equity and equity value.
Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.
Return on Total Assets = (Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets
List the total common stock dividend payout rate formula.
Cash Dividends to Common Shareholders / Net Income to Common Shareholders.
what is the formula of The price-earnings ratio
Price-Earnings Ratio (P/E Ratio) = Market Price for a Common Share / Earnings per (Common) Share (EPS)
F. Measures the price of a share of common stock relative to its latest earnings per share. Indicates a measure of how the market values the stock, especially when compared with other stocks.
AICPA.901110FAR-TH-FA Ratios - Profitability and Equity Are the following ratios useful in assessing the liquidity position of a company? Defensive-interval ratio Return on stockholders' equity Yes Yes Yes No No Yes No No
B
Correct!
The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources. Thus, the measure is a liquidity measure.
The return on stockholders’ equity is the ratio of income to average owners’ equity. This ratio is a profitability ratio, not a liquidity ratio. A firm could have a strong return on equity ratio and not be particularly liquid.
A
Incorrect…
Incorrect for return on equity. The return on stockholders’ equity is the ratio of income to average owners’ equity. This ratio is a profitability ratio, not a liquidity ratio. A firm could have a strong return on equity ratio and not be particularly liquid.
C
Incorrect…
Incorrect on both counts. The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources.
Thus, the measure is a liquidity measure.
The return on stockholders’ equity is the ratio of income to average owners’ equity. This ratio is a profitability ratio, not a liquidity ratio. A firm could have a strong return on equity ratio and not be particularly liquid.
AICPA.082120FAR-I.C
Ratios - Profitability and Equity
The following is the stockholders’ equity section of Harbor Co.’s balance sheet on December 31:
Common stock $10 par, 100,000 shares authorized, 50,000 shares issued of which 5,000 have been reacquired, and are held in treasury $ 450,000
Additional paid-in capital common stock 1,100,000
Retained earnings 800,000
Subtotal $2,350,000
Less treasury stock (150,000)
Total stockholders’ equity $2,200,000
Harbor has insignificant amounts of convertible securities, stock warrants, and stock options. What is the book value per share of Harbor’s common stock?
A. $31 B. $44 C. $46 D. $49
D
Correct!
Book value per share, for this basic situation, is total owners’ equity divided by the number of shares outstanding: $2,200,000/45,000 = $49 rounded to the nearest dollar. The number of shares outstanding equals the number of shares issued (50,000) less the number in the treasury (5,000).
Book Value per Common Stock = Common Shareholders' Equity / Number of Outstanding Common Shares D. Measures the per share amount of common shareholders' claim to assets. (See the section on this ratio in the owner's equity module for more details.)
AICPA.100917FAR-OCB-SIM
Alco, Inc., a small manufacturing company, prepares its financial statements using its income tax basis of accounting. In December, 2012, it determined that an error had been made in the amount of rent expense reported in its 2011 tax return. How should Alco account for the amount of the rental expense error in its 2012 financial statements?
A. As an adjustment to 2012 rental income.
B. As an income tax expense in 2012.
C. As a prior period adjustment.
D. No reporting in 2012 required.
B
Incorrect…
The amount of the 2011 rental expense error would not be reported as an adjustment to the 2012 income tax expense. Because the error was made in the tax return (and financial statements) of the prior period, it should be treated as a prior period adjustment in Alco’s 2012 financial statements.
A
Incorrect…
The amount of the 2011 error would not be reported as an adjustment to 2012 rental expense. Because the error was made in the tax return (and financial statements) of the prior period, it should be treated as a prior period adjustment in Alco’s 2012 financial statements.
AICPA.100912FAR-OCB-SIM
When a set of financial statements is prepared using the cash basis or the modified cash basis of accounting, which one of the following is least likely to be an appropriate financial statement title?
A. Statement of Cash Receipts and Cash Disbursements.
B. Balance Sheet.
C. Income Statement.
D. Statement of Financial Position.
C
Correct!
When the cash basis or the modified cash basis of accounting is used, the title Income Statement, which is appropriate when the accrual basis of accounting is used, should be replaced by the title Statement of Cash Receipts and Cash Disbursements. This helps distinguish that the statement is not based on full accrual accounting consistent with U.S. GAAP.
AICPA.100938FAR-OFS-SIM
The personal statement of financial condition for Allen Harvey reported a net worth of $825,000 on December 31, 20X0. During the calendar year 20X1, Harvey had earned income of $68,000. For 20X1, his broker's reports showed that his investments had increased by $23,000. In addition, for the year, his credit card debt increased $6,000 and his home mortgage principal balance decreased by $24,000. There were no other changes in Harvey's financial condition during 20X1. Which one of the following is Harvey's net worth as of December 31, 20X1? A. $934,000 B. $878,000 C. $866,000 D. $830,000
B
Incorrect…
This incorrect answer ($878,000) results from incorrectly adding the increase in credit card debt to net worth, rather than subtracting it from net worth. Thus, this incorrect answer resulted from $825,000 + $23,000 + $6,000 + 424,000 = $878,000, an incorrect answer. The correct answer would deduct the $6,000, not add it, which would result in $825,000 + $23,000 - $6,000 + $24,000 = $866,000, the correct answer.
AICPA.100936FAR-OFS-SIM
Jen has been employed by Komp, Inc. since February 1, 2009. Jen is covered by Komp's Section 401(k) deferred compensation plan. Jen's contributions have been 10% of salaries. Komp has made matching contributions of 5%. Jen's salaries were $21,000 in 2009, $23,000 in 2010, and $26,000 in 2011. Employer contributions vest after an employee completes three years of continuous employment. The balance in Jen's 401(k) account was $11,900 on December 31, 2011, which included earnings of $1,200 on Jen's contributions. What amount should be reported for Jen's vested interest in the 401(k) plan in Jen's December 31, 2011, personal statement of financial condition? A. $11,900 B. $8,200 C. $7,000 D. $1,200
D
Incorrect…
This incorrect answer ($1,200) results from including only the earnings on Jen’s contributions and failing to include Jen’s contributions. The earnings on Jen’s contributions was given as $1,200. The correct answer is Jen’s salaries of $21,000 + $23,000 + $26,000 = $70,000 x Jen’s contribution rate of 10% = $7,000, plus the earnings on those contributions of $1,200 (given) = $8,200, the correct answer. Since Jen was employed on February 1, 2009, as of December 31, 2011, the employer’s (Komp’s) contributions have not vested and, therefore, do not “belong” to Jen and should not be included in Jen’s personal statement of financial condition.
B
Correct!
Jen’s personal statement of financial condition should report only the contributions and earnings to which Jen has a claim (i.e., that have vested). Thus, the correct answer is Jen’s salaries of $21,000 + $23,000 + $26,000 = $70,000 x Jen’s contribution rate of 10% = $7,000, plus the earnings on those contributions of $1,200 (given) = $8,200, the correct answer. Since Jen was employed on February 1, 2009, as of December 31, 2011, the employer’s (Komp’s) contributions have not vested and, therefore, do not “belong” to Jen and should not be included in Jen’s personal statement of financial condition.
AICPA.100930FAR-OFS-SIM
Personal Financial Statements
On May 31, 20X7, Quay owned a $10,000 whole-life insurance policy with a cash-surrender value of $4,500, net of loans of $2,500. In Quay's May 31, 20X7, personal statement of financial condition, what amount should be reported as investment in life insurance? A. $4,500 B. $7,000 C. $7,500 D. $10,000
A
Correct!
In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any loan(s) outstanding against the policy. The facts in this question state that the policy has “a cash-surrender value of $4,500, net of loans of $2,500.” So, although the policy has a $2,500 loan outstanding against it, that amount already has been deducted (net of loans) in determining the $4,500 value.
B
Incorrect…
This incorrect answer ($7,000) results from adding the amount of loans ($2,500) to the net cash surrender value ($4,500), an incorrect approach. In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any loan(s) outstanding against the policy. The facts in this question state that the policy has “a cash-surrender value of $4,500, net of loans of $2,500.” The life insurance policy should be reported at $4,500, the amount net of loans.
C
Incorrect…
This incorrect answer ($7,500) results from deducting the amount of loans ($2,500) from the death benefit ($10,000), which is an incorrect approach. In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any loan(s) outstanding against the policy. The facts in this question state that the policy has “a cash-surrender value of $4,500, net of loans of $2,500.” Thus, the life insurance policy should be reported at $4,500, the amount net of loans.
D
Incorrect…
This incorrect answer ($10,000) results from using the death benefit amount as the amount to be reported as investment in life insurance, an incorrect approach. In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any loan(s) outstanding against the policy. The facts in this question state that the policy has “a cash-surrender value of $4,500, net of loans of $2,500.” Thus, the life insurance policy should be reported at $4,500, the amount net of loans.
AICPA.100933FAR-OFS-SIM
Personal Financial Statements
Personal financial statements should report an investment in life insurance at the
A. Face amount of the policy less the amount of premiums paid.
B. Cash value of the policy less the amount of any loans against it.
C. Cash value of the policy less the amount of the premiums paid.
D. Face amount of the policy less the amount of any loans against it.
B
Correct!
Assets should be reported at estimated current value (fair value), which for a life insurance policy is the current cash value, less the settlement amount of any loans against the life insurance policy.
C
Incorrect…
An investment in life insurance should not be reported in personal financial statements at the cash value of the policy less the amount of premiums paid. As an asset, an investment in life insurance should be reported at estimated current value (fair value), which for a life insurance policy is the current cash value, less the settlement amount of any loans against the policy. The premium payments, in part, establish the cash value of the policy and should not be subtracted from the cash value.
Personal Financial Statements
AICPA.100935FAR-OFS-SIM
Clint owns 50% of Vohl Corp.'s common stock. Clint paid $20,000 for this stock in 2006. As of December 31, 2011, Clint's 50% stock ownership in Vohl had a fair value of $180,000. Vohl's cumulative net income and cash dividends declared for the five years ended December 31, 2011, were $300,000 and $40,000, respectively. In Clint's personal statement of financial condition on December 31, 2011, what amount should be shown as the investment in Vohl? A. $20,000 B. $150,000 C. $170,000 D. $180,000
C
Incorrect…
This incorrect answer ($170,000) results from reporting the investment in Vohl at 50% of Vohl’s cumulative net income since the stock was acquired by Clint ($300,000) plus 50% of the cash dividends declared by Vohl since the stock was acquired by Clint ($40,000). Thus, this incorrect calculation was $300,000 + $40,000 = $340,000 x .50 = $170,000, an incorrect answer. Assets should be reported in a personal statement of financial condition at estimated current value (fair value), which for the Vohl stock is $180,000 on December 31, 2011.
D
Correct!
Assets should be reported in a personal statement of financial condition at estimated current value (fair value), which for the Vohl stock is $180,000 on December 31, 1991. The cumulative income earned and cash dividends paid by Vohl since it was acquired by Clint would enter into the determination of Clint’s annual income during the prior 5 years, but would not enter into the determination of the estimated current value of the investment on December 31, 2011.
PQ6984 IFRS for SMEs There are separate international standards for preparing financial statements by small- and medium-sized entities. True False
False
