Profitability Analysis and Analytical Issues

11306 Words Oct 11th, 2013 46 Pages
140

SU 3: Profitability Analysis and Analytical Issues

QUESTIONS
3.1 Profitability Ratios
Questions 1 and 2 are based on the following information. The financial statements for Dividendosaurus, Inc., for the current year are as follows:
Balance Sheet
Cash
Accounts receivable
Inventory
Net fixed assets
Total

$100
200
50
600
$950

Accounts payable
Long-term debt
Capital stock
Retained earnings
Total

$140
300
260
250
$950

1. Dividendosaurus has return on assets of
A. 21.1%
B. 39.2%
C. 42.1%
D. 45.3%

2. Dividendosaurus has a profit margin of
A. 6.67%
B. 13.33%
C. 14.33%
D. 46.67%
3. In the current year, Griffin Inc. had $15 million in sales, while total fixed costs were held to $6 million.
…show more content…
The dividend is payable on
June 24 to all stockholders of record as of June 17.
Excerpts from the statement of financial position for
Jensen Corporation as of May 31 are presented as follows. Cash
Accounts receivable (net)
Inventories
Total current assets

$ 400,000
800,000
1,200,000
$2,400,000

Total current liabilities

$1,000,000

Assume that the only transactions to affect Jensen
Corporation during June are the dividend transactions. 5. Jensen’s total stockholders’ equity would be
A. Unchanged by the dividend declaration and decreased by the dividend payment.
B. Decreased by the dividend declaration and increased by the dividend payment.

Answer (D) is correct. (CMA, adapted)
REQUIRED: The impact on total stockholders’ equity of dividend declaration and payment.
DISCUSSION: A dividend declaration reduces retained earnings and thus total stockholders’ equity. The subsequent payment will have no effect on stockholders’ equity since only cash and dividends payable are reduced.

C. Unchanged by either the dividend declaration or the dividend payment.
D. Decreased by the dividend declaration and unchanged by the dividend payment.
6. If the dividend declared by Jensen Corporation had been a 10% stock dividend instead of a cash dividend, Jensen’s current liabilities would have been
A. Unchanged by the dividend declaration and increased by the dividend distribution.

Answer (D) is
Open Document