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
AICPA.100902FAR-OFS-SIM
IFRS for SMEs
Under IFRS for SMEs, which of the following methods, if any, can be used by an investor to account for an investment in another entity (an associate) over which the investor has significant influence? Cost Method Equity Method Yes Yes Yes No No Yes No No
Incorrect…
Under IFRS for SMEs, both the cost and equity method may be used by an investor to account for an investment in another entity (called an “associate” in IFRS for SMEs) over which the investor has significant influence. This answer would be correct under U.S. GAAP because only the equity method is required; the cost method may not be used.
BCD
Incorrect…
Under IFRS for SMEs, both the cost and equity method may be used by an investor to account for an investment in another entity (called an “associate” in IFRS for SMEs) over which the investor has significant influence. This answer would be correct under U.S. GAAP because only the equity method is required; the cost method may not be used.
AICPA.100904FAR-OFS-SIM
Under IFRS for SMEs, which of the following, if any, must be disclosed in financial statements?
Earnings per Share (EPS) Information by Segment
Yes Yes
Yes No
No Yes
No No
ABC
Incorrect…
Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users.
D
Correct!
Under IFRS for SMEs, neither earnings per share (EPS), nor information by segment is required in financial statements. Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies, earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either U.S. GAAP or full IFRS.
AICPA.921113FAR-TH-FA
cash
On October 31, 2005, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15, 2005, payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in Dingo’s October 31, 2005, classified balance sheet?
A. The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability. C. The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft. D. The segregated and regular accounts should be reported as current assets net of the overdraft.
A
Correct!
The accounts are with different banks. Thus, the accounts cannot be offset against one another.
The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount.
The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.
B
Incorrect…
The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.
D
Incorrect…
Incorrect on two counts. First, the segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes. The segregated account should not be merged with the other accounts.
Second, accounts with different banks cannot be offset. The overdrawn account cannot be offset against the regular corporate account.
AICPA.940512FAR-FA
Cash
The following information pertains to Grey Co. on December 31, 2003:
Checkbook balance
$12,000
Bank statement balance
16,000
Check drawn on Grey’s account, payable to a vendor, dated and recorded 12/31/03 but not mailed until 1/10/04
1,800
On Grey’s December 31, 2003 balance sheet, what amount should be reported as cash?
A. $12,000 B. $13,800 C. $14,200 D. $16,000
A, C, D
Incorrect…
The $1,800 check should be added back to the cash account. The check has not been mailed. Thus, no cash payment has been made.
C
Incorrect…
Incorrect on two counts. This answer deducts the $1,800 check from the bank statement balance. The check should be added, not subtracted, to the checkbook balance, not the bank statement balance. This check reduced the balance in the checkbook but was not mailed. Thus, the amount remains in Grey’s cash balance at the end of the year. The bank statement balance is not the correct balance because information about transactions affecting cash near the end of the month, recorded by Grey, did not reach the bank by the cutoff date.
B
Correct!
The correct cash balance is the balance per the checkbook ($12,000) plus the $1,800 check written to the vendor, for a total of $13,800.
This check reduced the balance in the checkbook but was not mailed. Thus, the amount remains in Grey’s cash balance at the end of the year. The bank statement balance is not the correct balance because information about transactions affecting cash near the end of the month, recorded by Grey, did not reach the bank by the cutoff date.
AICPA.930501FAR-P1-FA
The following is Gold Corp.’s June 30, 2004, trial balance:
Cash overdraft $ 10,000 Accounts receivable, net $ 35,000 Inventory 58,000 Prepaid expenses 12,000 Land held for resale 100,000 Property, plant, and equipment, net. 95,000 Accounts payable and accrued expenses 32,000 Common stock 25,000 Additional paid-in capital 150,000 Retained earnings 83,000 \_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_ $300,000 $300,000 ======== ======== Additional information: Checks amounting to $30,000 were written to vendors and recorded on June 29, 2004, resulting in a cash overdraft of $10,000. The checks were mailed on July 9, 2004. Land held for resale was sold for cash on July 15, 2004. Gold issued its financial statements on July 31, 2004. In its June 30, 2004, balance sheet, what amount should Gold report as current assets?
A. $225,000 B. $205,000 C. $195,000 D. $125,000
A
Correct!
Current assets are those assets expected to be consumed or realized in cash within one year of the balance sheet date. There is no overdraft because the checks were not sent as of the balance sheet date. Thus, the balance sheet should disclose $20,000 in cash ($30,000 - $10,000).
The land held for resale is a current asset because it is expected to be sold in the next year (and the corroboration of this expectation was known before the issuance of the financial statements).
Cash $ 20,000 Net accounts receivable 35,000 Inventory 58,000 Prepaid expenses 12,000 Land held for resale 100,000 Total current assets $225,000
AICPA.901101FAR-P1-FA
Bank Reconciliations
In preparing its August 31, 1990 bank reconciliation, Apex Corp. has the following information available:
Balance per bank statement, 8/31/90 $18,050
Deposit in transit, 8/31/90 3,250
Return of customer’s check for insufficient funds, 8/31/90 600
Outstanding checks, 8/31/90 2,750
Bank service charges for August 100
On August 31, 1990, Apex’s correct cash balance is
A. $18,550
B. $17,950
C. $17,850
D. $17,550
D
Incorrect…
This answer does not adjust the balance per bank statement by the correct amounts. The following is the correct adjustment: Balance per bank statement $18,050 Plus deposit in transit 3,250 Less outstanding checks (2,750) Equals ending cash balance $18,550
A
Correct!
Balance per bank statement $18,050
Plus deposit in transit 3,250
Less outstanding checks (2,750)
Equals ending cash balance $18,550
The effects of the bank service charges and the insufficient funds check are already reflected in the balance per bank statement. The bank was the source of that information.
AICPA.900501FAR-P1-FA
Bank Reconciliations
Poe, Inc. had the following bank reconciliation at March 31, 2005:
Balance per bank statement, 3/31/05 $46,500
Add deposit in transit 10,300
56,800
Less outstanding checks 12,600
Balance per books, 3/31/05 $44,200
Data per bank for the month of April 2005 follow:
Deposits $58,400
Disbursements 49,700
All reconciling items at March 31, 2005 cleared the bank in April. Outstanding checks at April 30, 2005 totaled $7,000. There were no deposits in transit at April 30, 2005. What is the cash balance per books at April 30, 2005? A. $48,200 B. $52,900 C. $55,200 D. $45,900
B
Incorrect…
$52,900 equals the book balance at 3/31 plus deposits per the bank records in April less the disbursements per the bank records in April.
However, the bank records do not accurately reflect all the relevant transactions in April per the books. For example, the deposits per the bank records in April include a deposit made in March (the deposit in transit for that month). Therefore, the bank records must be adjusted for differences between the bank statement and the book records:
Balance per books, 3/31 $44,200
Deposits per bank, April $58,400
Less deposit in transit, 3/31 (10,300)
Equals deposits made by firm in April 48,100
Checks clearing bank in April $49,700
Less outstanding checks, 3/31 (12,600)
Plus outstanding checks, 4/30 7,000
Equals checks written by firm in April (44,100)
Balance per books, 4/30 $48,200
A
Correct!
Balance per books, 3/31 $44,200 Deposits per bank, April $58,400 Less deposit in transit, 3/31 (10,300) Equals deposits made by firm in April 48,100 Checks clearing bank in April $49,700 Less outstanding checks, 3/31 (12,600) Plus outstanding checks, 4/30 7,000 Equals checks written by firm in April (44,100) Balance per books, 4/30 $48,200
AICPA.930512FAR-P1-FA
The following information relates to Jay Co.’s accounts receivable for 2004:
Accounts receivable, 1/1/04 $ 650,000 Credit sales for 2004 2,700,000 Sales returns for 2004 75,000 Accounts written off during 2004 40,000 Collections from customers during 2004 2,150,000 Estimated future sales returns at 12/31/04 50,000 Estimated uncollectible accounts at 12/31/04 110,000 What amount should Jay report for accounts receivable, before allowances for sales returns and uncollectible accounts, on December 31, 2004?
A. $1,200,000 B. $1,125,000 C. $1,085,000 D. $925,000
A,C,D
Incorrect…
This amount is net accounts receivable, which equals gross accounts receivable less the allowances for future sales returns and uncollectible accounts:
AR 1/1 + Credit sales - Sales returns - Write-offs - Collections = AR 12/31
AR 12/31 - estimated sales returns - estimated uncollectible accounts = net AR
$650,000 + $2,700,000 - $75,000 - $40,000 - $2,150,000 = $1,085,000
$1,085,000 - $50,000 - $110,000 = $925,000
C
Correct!
The question is asking for the gross accounts receivable balance, before allowances for future sales returns, allowances, and uncollectible accounts:
AR 1/1 + Credit sales - Sales returns - Write-offs - Collections = AR 12/31
$650,000 + $2,700,000 - $75,000 - $40,000 - $2,150,000 = $1,085,000
Direct Write-Off and Allowance
AICPA.990506FAR-FA
In its December 31 balance sheet, Butler Co. reported trade accounts receivable of $250,000 and related allowance for uncollectible accounts of $20,000.
What is the total amount of risk of accounting loss related to Butler’s trade accounts receivable, and what amount of that risk is off-balance sheet risk?
Risk of accounting loss Off-balance sheet risk $0 $0 $230,000 $0 $230,000 $20,000 $250,000 $20,000
A
Correct!
This question requires an understanding of two accounting concepts:
- Risk of accounting loss on accounts receivable (credit risk). This is the risk of loss resulting from not collecting amounts due from sales made on credit, and is the total amount of loss that Butler would suffer if those who owe it failed to make any payments and the receivables proved to be of no value. Since Butler’s net carrying value of accounts receivable is $230,000 ($250,000 - $20,000), that is the amount of risk of accounting loss.
- Off-balance sheet risk: This is the amount of risk of loss that does not show on the balance sheet. Since all of Butler’s net accounts receivable show on the balance sheet, there is no off-balance sheet risk associated with the accounts receivable.
