Finance Example Exercise 15-9

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Questions and Answers

What is the formula to calculate the rate earned on total assets?

(Net Income + Interest Expense) / Average Total Assets (correct)

Net Income - Interest Expense / Average Total Assets

(Net Income + Interest Expense) * Average Total Assets

Net Income / Average Total Assets

If Lincoln Company's net income for 2008 is $91,000 and total stockholders' equity at the beginning of the year was $787,500, what is needed to determine the rate earned on stockholders' equity?

Net income and total assets

Both beginning and end of year stockholders' equity (correct)

Only the end of year equity

Interest expense for the year

What does the rate earned on stockholders’ equity measure specifically?

Rate of income earned on stockholders' investments (correct)

Total revenue generated by the company

Rate of income based on total liabilities

Total assets divided by net income

Which financial statement component is NOT directly used to calculate the rate earned on total assets?

Average Total Liabilities Signup and view all the answers

What does a higher rate earned on total assets indicate about a company?

More efficient use of assets to generate income Signup and view all the answers

How does the dividend yield benefit common stockholders?

It indicates the rate of return in terms of cash dividends. Signup and view all the answers

What was the trend in dividend yield from 2007 to 2008 for Lincoln Company?

The dividend yield decreased. Signup and view all the answers

How is solvency defined in financial terms?

The ability to meet financial obligations. Signup and view all the answers

What is the definition of working capital?

Current assets minus current liabilities. Signup and view all the answers

Which analysis focuses on a business's ability to pay its current liabilities?

Current position analysis Signup and view all the answers

Which of the following is NOT a measure of solvency?

Return on assets Signup and view all the answers

What does a gross profit margin of 35% indicate?

The gross profit is 35% of sales. Signup and view all the answers

What does an inventory turnover of 5.0 imply for a company?

The company sells and replaces its inventory five times a year. Signup and view all the answers

Which financial figure decreased from 2007 to 2008 for Lincoln Company?

Ending inventory Signup and view all the answers

Which component had the highest percentage increase in revenues in the income statement?

Net sales Signup and view all the answers

Which of the following expenses increased the most in percentage terms?

Selling expenses Signup and view all the answers

Which liability category experienced the largest dollar increase in the 2008 financials?

Long-term liabilities Signup and view all the answers

Study Notes

Financial Metrics and Analysis

Rate Earned on Total Assets
- Calculated using the formula: (Net Income + Interest Expense) / Average Total Assets.
- For current year: (125,000+125,000 + 125,000+25,000) / $2,000,000 = 7.5%.
Rate Earned on Stockholders’ Equity
- Measures income earned relative to stockholder investment.
- Lincoln Company’s net income increased from 76,500in2007to76,500 in 2007 to 76,500in2007to91,000 in 2008.
Stockholders’ Equity Analysis
- Beginning of year: 787,500(2007),Endofyear:787,500 (2007), End of year: 787,500(2007),Endofyear:829,500 (2008).
- Total stockholders’ equity growth of 5.3% from 2007 to 2008.

Current Assets and Income Statement Insights

Comparative Schedule of Current Assets
- Total current assets rose from 533,000in2007to533,000 in 2007 to 533,000in2007to550,000 in 2008, a 3.2% increase.
- Significant increase in cash by 39.9% and marketable securities by 25%.
Comparative Income Statement
- Sales increased by 24.0%, from 1,234,000in2007to1,234,000 in 2007 to 1,234,000in2007to1,530,500 in 2008.
- Gross profit grew from 380,000to380,000 to 380,000to455,000, reflecting a 19.7% increase.
- Net income saw a 19.0% rise, totaling $91,000 in 2008.

Inventory Management

Inventory Turnover Ratio
- Calculated by dividing cost of goods sold by average inventory.
- For Lincoln Company: 1,043,000(COGS)/1,043,000 (COGS) / 1,043,000(COGS)/273,500 (Avg. Inventory) = 3.8 (2008).
Number of Days’ Sales in Inventory
- Average daily cost of goods sold is $2,858.
- Number of days’ sales in inventory calculated as average inventory divided by average daily COGS provides insight into inventory management efficiency.

Dividends and Shareholder Return

Dividends and Earnings per Share (EPS)
- 2008 dividends per share increased to 0.80from0.80 from 0.80from0.60 in 2007.
- EPS also rose over the same period, reflecting improved profitability.
Dividend Yield
- Calculated as dividends per share divided by market price per share.
- For 2008: 0.80/0.80 / 0.80/41.00 = 2.0%, slightly down from 2.2% in 2007.

Solvency and Financial Obligations

Solvency Defined
- Refers to a business's ability to meet its financial obligations (debts) while profitability speaks to the ability to earn income.
Current Position Analysis
- Focused on evaluating a company’s capability to pay current liabilities, important for short-term creditors.
Working Capital
- Defined as the excess of current assets over current liabilities, a critical measure for assessing a company’s liquidity.

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Description

This quiz focuses on analyzing a company's financial statements, including its income statement and balance sheet. Participants will calculate the average rate earned on total assets and interpret the financial metrics presented. Gain insight into key finance concepts through this practical exercise.