ACCT 504 Week 8, Final Exam 1 SOLVED

ACCT 504 Week 8, Final Exam 1 SOLVED

1. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?
Reduced legal liability for investors
Harder to transfer ownership
Lower taxes
Most common form of organization

2. Dividends _____.
represent an expense and are an operating activity
represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity

3. Below is a partial list of account balances for LBJ Company:
Cash $15,000
Prepaid insurance 5,000
Accounts receivable 2,500
Accounts payable 3,000
Notes payable 6,000
Common stock 10,000
Dividends 500
Revenues 15,000
Expenses 13,000
What did LBJ Company show as total debits?
$34,000
$36,000
$70,000
$31,000

4. Under the accrual basis of accounting, revenues are recorded and reported _____.
when companies receive payments for jobs performed or products provided
when companies have provided products or performed services
when companies receive payments prior to providing products or performing services
when companies receive payments after providing products or performing services

5. In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?
LIFO
The average cost method
FIFO
Income tax expense for the period will be the same under all assumptions.
6. Equipment was purchased for $55,000 on January 1, 2011. Freight charges of $2,200 were incurred and there was a cost of $1,800 for installation. It is estimated the equipment will have a $5,500 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____.
$10,340
$10,700
$10,260
$9,900



7. Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____.
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000

8. Accounts receivable arising from sales to customers amounted to $80,000 and $120,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $2,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.
$2,040,000
$2,000,000
$1,200,000
$1,960,000



9. If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis?
Industry averages analysis
Intercompany analysis
Common-size analysis
Intracompany analysis

10. The formula for performing horizontal analysis is _____.
(Current Year Amount minus Base Year Amount) divided by Current Year Amount
Base Year Amount divided by Current Year Amount
Current Year Amount minus Base Year Amount
(Current Year Amount minus Base Year Amount) divided by Base Year Amount

11.Horizontal analysis of comparative financial statements includes the _____.
development of common-size statements
calculation of liquidity ratios
calculation of dollar amount changes and percentage changes from the previous year to the current year
evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount

12. A common measure of solvency is the _____.
asset turnover
current cash debt coverage ratio
cash debt coverage ratio
current ratio

13. Stockholders would be most interested in which of the following ratios?
Days in inventory
Free cash flow
Current ratio
Average collection period

14. To calculate the market value of a bond, we need to _____.
multiply the bond price times the interest rate
calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and interest payments

 

True/False

1.The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected return.

False

 

2.Only a few financial decisions involve some sort of risk-return tradeoff.

False

 

3.The sole proprietorship can be described as the absence of any legal business structure.

True

 

4.In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.

True

 

5.There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.

False

 

6.General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.

False

 

7.Ultimate control in a corporation is vested in the board of directors.

False

 

8.There are a significant number of legal requirements to follow when establishing a sole proprietorship.

False

 

9.Limited partners may actively manage the business.

False

 

10.The life of a corporation is not dependent upon the status of the investors.

True

 

11.A sole proprietorship is the most desirable business form in all circumstances.

False

 

12.In a sole proprietorship, the owner is personally responsible without limitation for the liabilities incurred.

True

 

13.In a limited partnership, at least one general partner must remain in the association; the privilege of limited liability still applies to this partner.

False

 

14.In a general partnership, there is a distinction between business and personal assets.

False

 

15.In order to maximize shareholder wealth, a firm must consider historical costs as an integral part of their decision-making.

 

16.Financial management is concerned with the maintenance and creation of wealth. True

True

 

17.Shareholder wealth is measured by the market value of the firm's common stock. True

True

 

18.The agency problem arises due to the separation of ownership and control in a firm.

True

 

19.There is little, if any, difference between a business error and an ethical error.

False

20.For markets to be efficient, price adjustments to new information must be correct.

False

 

21.Ethical dilemmas frequently exist in finance.

True

 

22.Even though diversification can eliminate risk, it also makes it more difficult to measure a project's or an asset's risk.

True

 

23.Consider the following equally likely project outcomes: Profit XY Pessimistic prediction$0$500 Expected outcome$ 500$500 Optimistic prediction$1000 $500

a.Project Y has less uncertainty than Project X.

 b.Project X has more variability than Project Y.

c.a and b.

d.Since Projects X and Y have the same expected outcomes of $500, investors will view them as identical in value.

 

24.Maximization of shareholder wealth as a goal is superior to profit maximization because:

a.it considers the time value of the money.

b.following the shareholder wealth maximization goal will ensure high stock prices.

c.it considers uncertainty.

d.a and c.

 

25.Why is maximizing shareholder wealth a better goal than maximizing profits?

a.Maximizing shareholder wealth places greater emphasis on the short term.

b.Maximizing profits ignores the uncertainty that is related to expected profits.

c.Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments.

d.Maximizing profits gives too much weight to the tax position of shareholders.

 

26. Profit maximization does not adequately describe the goal of the firm because:

 a.profit maximization does not require the consideration of risk.

b.profit maximization ignores the timing of a project's return.

c.maximization of dividend payout ratio is a better description of the goal of the firm.

d.a and b.

 

27. Consider cash flows for Projects X and Y such as: Project XProject Y Year 1$3000 $0 Year 2$0$3000 A rational person would prefer receiving cash flows sooner because:

a.the money can be reinvested.

b.the money is nice to have around.

c.the investor may be tired of a particular investment.

d.the investor is indifferent to either proposal.

 

28. What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?

a.Sole proprietorships are subject to double taxation of profits.

b.The cost of formation.

c.Inadequate profit sharing.

d.Owners have unlimited liability.

 

29. Which of the following is not true for limited partnerships?

a. Limited partners can only manage the business.

b. One general partner must exist who has unlimited liability.

c. Only the name of general partners can appear in the name of the firm.

d. Limited partners may sell their interest in the company.

 

30 .In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost?

a.General partnership, sole proprietorship, limited partnership, corporation

b.Sole proprietorship, general partnership, limited partnership, corporation

c.Corporation, limited partnership, general partnership, sole proprietorship

d.Sole proprietorship, general partnership, corporation, limited partnership

 

31.Coplon, Inc., an industrial firm, earned $180,000 in dividends in 1993 on their stock holding in the Finco Company. How much of the dividends are excluded from Coplon's taxable income?

a.$27,000

b.None

c.$126,000

d.$153,000

 

32.Which one of the following categories of owners enjoys limited liability?

a.General partners in a limited partnership

b.Shareholders (common stock) of a corporation

c.Sole proprietors

d.Both a & b

 

33. Which of the following is a characteristic of a limited partnership?

a.It allows one or more partners to have limited liability.

b.It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply.

c.It prohibits the limited partners from participating in the management of the partnership.

d.all of the above.

 

34.Which of the following categories of owners have limited liability?

a.General partners

b.Sole proprietors

c.Shareholders of a corporation

d.Both a and b

 

35.Which of the statements below is true?

a.The sole proprietorship and the general partnership both feature unlimited liability.

b.It is very complicated (legally) to establish a corporation.

c.No legal criterion exists for a general partnership.

d.All of the above are true.

 

36.Which of the following types of business forms is the most ideal in terms of attracting new capital? a.Sole proprietorship

b.Limited partnership

c.General partnership

d.A public corporation

 

37.Which forms of organization are free of initial legal requirements?

a.Sole proprietorship

b.General partnership

c.Corporation

d.Both a and b

 

38. For these types of organization, no distinction is made between business and personal assets.

a. Sole proprietorship

b. General partnership

c. Limited partnership

d. All of the above

e. Both a and b

 

39.Which of the following is a significant disadvantage of a general partnership?

a.The cost of forming it is high.

b.Each partner is fully responsible for the liabilities incurred by the partnership.

c.There is a risk associated with the industry in which it operates.

d.Forming the business is very complex.

 

40.Which of the following should be considered when assessing the financial impact of business decisions?

a.The amount of projected earnings

b.The risk-return tradeoff

c.The timing of projected earnings; i.e., when they are expected to occur

d.The amount of the investment in a given project

e.All of the above

 

41. Which of the following forms of business organization is the dominant economic force in the United States?

a.The sole proprietorship

b.The general partnership

c.The limited partnership

d.The joint venture

e.The corporation

 

42.Which of the following reasons is most responsible for corporations being the most important form of business organization in the United States?

a.Corporations have limited life.

b.Stockholders have unlimited liability.

c.Corporations are subject to less government regulation than the other forms of business organization. d.Corporations have the ability to raise larger sums of capital than the other forms of business organization.

 e.Corporations are subjected to less taxation than the other forms of business organization.

 

43.How could you compensate an investor for taking on a significant amount of risk?

a.Increase the expected rate of return.

b.Raise more debt capital.

c.Offer stock at a higher price.

d.Increase sales.

 

44.Which of the following would be most likely to align the interests of managers and shareholders? a. Fixed but high salaries

b. Large bonuses

c. Stock options

d. All of the above

e. None of the above

 

45.What does the agency problem refer to?

a.The conflict that exists between the board of directors and the employees of the firm

b.The problem associated with financial managers and Internal Revenue agents

c.The conflict that exists between stockbrokers and investors

d.The problem that results from potential conflicts of interest between the manager of a business and the stockholders

e.None of the above

 

46.A limited liability company (LLC) is:

a.able to retain limited liability for owners.

b.taxed like a corporation.

c.a cross between a partnership and a corporation.

d.a and c.

e.all of the above.

 

47.Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:

a.a secondary market transaction.

b.an initial public offering.

c.a seasoned new issue.

d.both a and b.

 

48.In measuring value, the focus should be on:

 a.cash flow.

b.accounting profits.

c.time value of money.

d.earnings per share.

 

49.Which of the following is true regarding accounting profits?

a.Received by the firm and reinvested

b.Reflects money in hand

c.Represents actual money received and paid out

d.Equals cash in the bank

 

50.Which of the following statements is true regarding competitive markets?

 a.Large profits exist over the long run.

b.Product differentiation produces insulation for competitors.

c.Cost advantages attract new entrants.

d.Both b and c.

 

51.Which of the following decrease new competition in competitive markets?

 a.Economies of scale

b.Proprietary technology

c.Product differentiation

d.Both a and b

e.All of the above

 

52. Cost advantages in competitive markets:

 a.have the potential to create large profits.

b.deter new entrants from entering.

c.can be created by economies of scale.

d.all of the above.

 

53.Which of the following is a characteristic of an efficient market?

a.Small number of individuals.

b.Opportunities exist for investors to profit from publicly available information.

c.Security prices reflect fair value of the firm.

d.Immediate response occurs for new public information.

 

54. Diversification increases when ________ decreases.

a.variability

b.return

c.risk

d.a and c

e.all of the above

 

55. IBM issuing new shares of common stock would be classified as:

a. a new seasoned issue.

b. an initial public offering.

c. a secondary market transaction.

 d. a and b.

 

56. According to the agency problem, _________ represent the principals of a corporation. a.shareholders b.managers c.employees d.suppliers

 

57. The opening of new international markets to the U.S. can be attributed to:

a.acceptance of a free market system by third world countries.

b.regulation of U.S. industries.

c.increase in information technology.

d.a and c.

e.all of the above. Short-Answer Questions

 

58.Briefly discuss mechanisms that can be used to align the interests of shareholders and managers.

The interests of shareholders and managers can be aligned by setting up stock options, bonuses, and perquisites that are directly tied to how closely management decisions coincide with the interest of shareholders.

59.Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.

As per Principle 3: “Cash—Not Profits—Is King”, and Principle 4: “Incremental Cash Flows—It’s only what changes that counts, we should focus on free cash flows—that is, the incremental or different after-tax cash flows attributed to the investment proposal.   We focus on cash flows rather than accounting profits, because these are the flows that the firm receives and can reinvest.  Only by examining cash flows are we able to analyze the timing of the benefit or cost correctly.  Also, we are only interested in these cash flows on an after-tax basis, as only those flows are available to the shareholder.  In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.

60.Discuss the risk/return tradeoff and how it relates to finance.

The Risk-Return Trade-Off states that investors demand a higher return for taking on additional risk; This risk-return relationship will be a key concept as we value stocks, bonds, and proposed new projects because in Finance we learn that the higher the risk, the higher the return investors would require, and the lower the price of stocks and bonds.

61.Compare and contrast primary market and secondary market transactions as it relates to the flow of funds in the transactions.

The proceeds from the sale in the primary market go to the corporation issuing the security. The proceeds from the sale in the secondary market go to the previous owner of the stock, not the corporation.

62.Discuss how new entrants are deterred from entering a competitive market.

There are several things that can deter new entrants from entering a competitive market. If the market consists of a high level of product differentiation, new entrants are discouraged from entry. Price is no longer a factor in this type of market as consumers are focused on the “brand equity” of the products being sold. In addition, some competitive markets insulate their participants from new entrants through service and quality differentiation. Cost advantages through such things as economies of scale, proprietary technologies, or control of raw materials can also deter new entry in competitive markets.

63.What is incremental cash flow and how is it used in project analysis?

Incremental cash flow represents the difference between the cash flows if a project is taken on versus what they will be if the project is not undertaken. When conducting project analysis, the focus should be on incremental cash flow. The concern is over “what is different” if the project is selected and how the project adds value to the firm.


Ch1:

1.            In the past, the study of finance has included
A)     mergers and acquisitions.

                B)    raising capital.

                C)    bankruptcy.

                D)    all of the above.

2.            One of the major disadvantages of a sole proprietorship is
A)    that there is unlimited liability to the owner.

                B)    the simplicity of decision making.

                C)    low organizational costs.

                D)    low operating costs.

3.            Many companies such as Tyco, Enron, WorldCom, etc. that suffered financial distress in the late 1990s and early 2000s,
A)    committed fraud.

                B)    had failed corporate governance oversight.

                C)    went bankrupt.

                D)    all of the above are true.

4.            Agency theory would imply that conflicts are more likely to occur between management and shareholders when
A)    the company is owned and operated by the same person.

                B)    management acts in the best interests of maximizing shareholder wealth.

                C)    the chairman of the board is also the chief executive officer (CEO).

                D)    the board of directors exerts strong and involved oversight of management

5.            Maximization of shareholder wealth is a concept in which
A)   increased earnings is of primary importance.

                B)    profits are maximized on a quarterly basis.

                C)    virtually all earnings are paid as dividends to common stockholders.

                D)    optimally increasing the long-term value of the firm is emphasized.

6.            Money markets would include which of the following securities?
A)    common stock and corporate bonds.

                B)    treasury bills and commercial paper.

                C)    certificates of deposit and preferred stock.

                D)    all of the above.

 

7.            The Internet has affected the financial markets by
A)    creating more competition between markets.

                B)    pushing the cost of trading down.

                C)    forcing brokerage companies to consolidate.

                D)   all of the above



 

Ch. 2

1.            A short-term creditor would be most interested in
A)           profitability ratios.

                B)    asset utilization ratios.

                C)    liquidity ratios.

                D)    debt utilization ratios.

2.            Given the balance sheet and income state for Simmons Maintenance Company, compute the ratios that are also shown for the industry average.  The "right answer" refers to the question of whether a particular ratio for Simmons is better or worse than the industry average. 

           

SIMMONS MAINTENANCE COMPANY

Balance Sheet

 
Assets
Liabilities
 
 
Cash
$  15,000
Accounts Payable
$  21,000
 
Accts. Receivable
22,000
Notes Payable
20,000
 
Inventory
    30,000
Accrued Expenses
      5,000
 
  Current Assets
67,000
Current Liabilities
46,000
 
Net Fixed Assets
    73,000
Long-term Debt
30,000
 
 
 
Stockholders' Equity
    64,000

 
 
Total Assets
$140,000
Total Liabilities & Stockholders' Equity
$140,000

 
 
 

Income Statement

 
Sales (80% credit)
 
$120,000
 
Less: Cost of Goods Sold
 
    45,000
 
Gross Profit
 
75,000
 
Selling and Administrative Expense
20,000
 
 
Rent Expense (Lease)
  8,000
    28,000
 
EBIT
 
47,000
 
Interest Expense
 
      5,000
 
Earnings before taxes
 
42,000
 
Taxes (@ 25%)
 
    10,500
 
Net Income
 
$  31,500
 
 
 
 
 
Common shares outstanding
 
15,000
 
EPS
 
$      2.10
 
 
 
 
 
 
 
 
 

 


 

Ratio
Ratios for Simmons
Industry Average
Better (B) or Worse (W)

 
Profit margin
26.25%
17.5%
(B)
Return on assets
22.50%
20.8%
(B)
Return on equity
49.22%
35%
(B)
Receivables turnover
4.36x
4.4x
(W)
Avg. collection period
82.5 days
68.0 days
(W)
Inventory turnover
4.0x
3.5x
(B)
Fixed asset turnover
1.64x
2.4x
(W)
Total asset turnover
.86x
.76x
(B)
Current ratio
1.46
1.28
(B)
Quick ratio
.80
.85
(W)
Debt to total assets
.54
.45
(W)
Times interest earned
9.4x
12.0x
(W)
Fixed charge coverage
4.23x
3.6x
(B)
 

 

Calculations:



 
 

= 26.25%


 
 

= 22.50%


 
 

= 49.22%


 
 

= 5.45x

 


 
 

= 82.5 days


 
 

= 4.0x


 
 

= 1.64x


 
 

= .86


 
 

= 1.46


 
 

= .80


 
 

= .54


 
 

= 9.4x


 
 

= 4.23
 


 

Ch. 4

1.            In developing the pro forma income statement we follow four important steps:

1)      compute other expenses,

2)      determine a production schedule,

3)      establish a sales projection,

4)      determine profit by completing the actual pro forma statement. 

                What is the correct order for these four steps?
A)           1,2,3,4

                B)    4,3,2,1

                C)    2,1,3,4

                D)    3,2,1,4

2.            Ellis Sport Shop projects the following sales:

               

April
May
June
$75,000
$95,000
$110,000
 

                Ninety percent of Ellis' sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale.  February sales were $60,000 and March sales were $70,000.  In the past Ellis' bad debt percentage has been 0 and is expected to continue.

               

a)      Prepare a monthly schedule of cash receipts for April-June.

b)      What is the balance of Receivables at the end of June.

 

Answer:

a)
 
February
March
April
May
June
 
Sales
$60,000
$70,000
$75,000
$95,000
$110,000
 
Credit Sales
54,000
63,000
67,500
85,000
99,000
 
Collections:
 
 
 
 
 
 
  Cash (10% of Sales)
6,000
7,000
7,500
9,500
11,000
 
60% first month after sale
 
 
37,800
40,500
51,300
 
40% second month after sale
 
 
  21,600
  25,200
    27,000
 
Total Receipts
 
 
$66,900
$75,200
$  89,300

 
b)
Receivables End of June:
 
 
90% of June Sales
$  99,000
 
 
 
 
40% of May Credit Sales
    34,200
 
 
 
 
 
 
$133,200
 
 
 
 
 
 
 
 
 
 
 
 
 


 

Ch. 5

1.            The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.



                A)    fixed costs

                B)    variable costs

                C)    marginal costs

                D)    semi-variable costs

 

2.            At the break-even point, a firm's profits are
A)           greater than zero.

                B)    less than zero.

                C)    equal to zero.

                D)    Not enough information to tell

 

3.            A highly automated plant would generally have
A)           more variable than fixed costs.

                B)    more fixed than variable costs.

                C)    all fixed costs.

                D)    all variable costs.

 

4.            If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to:

                A)    $13,333

                B)    $10,000

                C)    $30,000

                D)   $50,000

 

5.            Combined leverage is concerned with the relationship between
A)           changes in EBIT and changes in EPS.

                B)    changes in volume and changes in EPS.

                C)    changes in volume and changes in EBIT.

                D)    changes in EBIT and changes in net income.

 

6.                   Use the table to answer following questions:

 

Sales (75,000 units)
$750,000
Variable costs
  225,000
Contribution margin
$525,000
Fixed manufacturing costs
  187,500
Operating income
$337,500
Interest
    75,000
Earnings before taxes
$262,500
Taxes (at 31%)
    81,375
Net Income
$181,125
Shares outstanding
15,000
The Degree of Operating Leverage is

1.56x

 

The Degree of Financial Leverage is

1.29x    

 

The Degree of Combined Leverage is

2.0x 

0

1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization? (Points : 5)
       Limited liability of investor
       Transferability of ownership
       Simple to establish
       Unlimited life


 

2. (TCO A) Dividends _____. (Points : 5)
       represent an expense and are an operating activity
       represent an obligation and are an operating activity
       represent a distribution of earnings and are a financing activity
       represent an asset and are an investing activity


 

3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:

Cash                       $15,000
Prepaid insurance        5,000
Accounts receivable     2,500
Accounts payable        3,000
Notes payable             6,000
Common stock          10,000
Dividends                       500
Revenues                  15,000
Expenses                 13,000

What did LBJ Company show as total debits? 
(Points : 5)
       $34,000
       $36,000
       $70,000
       $31,000


 

4. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP? (Points : 5)
 
       The Accrual basis is easier to use.
       The Accrual basis is also preferred by the Internal Revenue Service.
       The Accrual basis complies with the revenue recognition and matching principles.
       The Accrual basis requires fewer accounting resources.


 

5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?(Points : 5)
       LIFO
       The average cost method
       FIFO
       Income tax expense for the period will be the same under all assumptions.


 

6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200 were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the straight-line method will be _____. (Points : 5)
       $13,800
       $14,440
       $12,600
       $13,240


 

7. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____. (Points : 5)
       debit to Cash of $100,000
       credit to Bonds Payable of $94,000
       credit to Premium on Bonds Payable of $4,000
       debit to Discount on Bonds Payable of $6,000


 

8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $100,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $1,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____. (Points : 5)
       $20,000
       $1,020,000
       $1,000,000
       $980,000


 

9. (TCO F) If you are making comparisons within a company to detect changes in financial relationships and significant trends, you are performing what type of analysis? (Points : 5)
       Industry averages analysis
       Intercompany analysis
       Common-size analysis
       Intracompany analysis


 

10. (TCO F) The formula for performing horizontal analysis is _____. (Points : 5)
       (Current Year Amount minus Base Year Amount) divided by Current Year Amount
       Base Year Amount divided by Current Year Amount
       Current Year Amount minus Base Year Amount
       (Current Year Amount minus Base Year Amount) divided by Base Year Amount


 

11. (TCO F) Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time _____.(Points : 5)
       that has been arranged from the highest number to the lowest number
       that has been arranged from the lowest number to the highest number
       to determine which numbers are in error
       to determine the amount and/or percentage increase or decrease that has taken place


 

12. (TCO F) A common measure of liquidity is _____. (Points : 5)
       debt-to-total-assets ratio
       cash debt coverage
       free cash flow
       working capital


 

13. (TCO F) Short-term creditors would be most interested in which of the following ratios? (Points : 5)
       Average collection period
       Times interest earned
       Cash debt coverage
       Free cash flow


 

14. (TCO G) To calculate the market value of a bond, we need to _____. (Points : 5)
       multiply the bond price times the interest rate
       calculate the present value of the principal only
       calculate the present value of the interest only
       calculate the present value of both the principal and 

1. (TCO A) Use the following partial financial statement information below to calculate the liquidity and profitability ratios. This information can be used to correctly solve each of the ratios below.

Average common shares outstanding            35,000    Current liabilities         $25,000
Capital expenditures                                  $20,000     Net income                $50,000
Cash provided by operations                       $77,000     Net sales                 $100,000
Preferred stock dividends paid                    $30,000     Total liabilities            $50,000
Current assets                                          $20,000     Total assets               $80,000

Instructions: Compute the following.

a) Current ratio
b) Working capital
c) Earnings per share
d) Debt-to-total-assets ratio
e) Free cash flow

To earn full credit, you must show the formula you are using, show your computations, and explain the meaning of each of your ratio results. (Points : 30)

(a) Current ratio = Current assets / Current liabilities = $20,000 / $25,000 = 0.80
A current ratio above 1.0 means current assets exceed current liabilities. This is important when determining if a firm has enough current assets to pay its current liabilities. The higher the better.

(b) Working capital = Current assets – Current liabilities = $20,000 – $25,000 = -$5,000
Working capital is the amount that would remain if a firm used its current assets to pay its current liabilities. Obviously, the higher the better.

(c) Earnings per share = Net income / Average common shares = $50,000 / 35,000 = $1.43
Earnings per share is the portion of a firm’s net income for each one of its shares. Shareholders are always interested in this figure to help measure a firm’s profitability. Obviously, the higher the better.

(d) Debt-to-total assets = Total liabilities / Total assets = $50,000 / $80,000 = 0.62
The debt-to-total assets ratio specifies the portion of total assets financed by debt. The remaining percentage, then, is the portion of total assets financed by equity. Lower is not always better

(e) Free cash flow = Operating cash flow – Capital expenditures = $77,000 – $20,000 = $57,000
Free cash flow is the cash flow available to be distributed among all of a firm’s securities holders after it pays its expenses and invests in its growth.     

 

2. (TCO D) The Oxford Company has budgeted sales revenues as follows.

                                   Oct                    Nov                  Dec
Credit sales              $120,000             $96,000           $72,000
Cash sales                  72,000               204,000           156,000
Total sales                  192,000             300,000            228,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month. Purchases of inventory are all on credit, with 60% paid in the month of purchase and 40% in the month following purchase. Budgeted inventory purchases are $260,000 in October, $180,000 in November, and $84,000 in December.

Other budgeted cash receipts include (a) the sale of plant assets for $49,400 in November and (b) the sale of new common stock for $67,400 in December. Other budgeted cash disbursements include (a) operating expenses of $27,000 each month, (b) selling and administrative expenses of $50,000 each month, (c) dividends of $76,000 to be paid in November, and (d) purchase of equipment for $24,000 cash in December.

The company has a cash balance of $40,000 at the beginning of December and wishes to maintain a minimum cash balance of $40,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that $14,000 of financing was obtained on November 1.

Requirements: Use this information to prepare a schedule of expected cash payments for purchases of inventory for the months of November and December only.

This question does not require creation of an entire cash budget so please only create the schedule that is asked for in the question because otherwise you will be wasting valuable time.
(Points : 30)

 

3. (TCOs B, E) The following items are taken from the financial statements of Lansing Company for 2010.

Accounts payable                        $16,500
Accounts receivable                      25,500
Accumulated depreciation              12,600
Bonds payable                              35,000
Cash                                             55,000
Common stock                              75,000
Cost of goods sold                        53,000
Depreciation expense                      6,300
Dividends                                        5,300
Equipment                                     35,000
Interest expense                              4,300
Patents                                           6,500
Retained earnings, January 1          80,000
Salaries expense                           42,000
Sales revenue                             115,000
Supplies                                         3,500

Instructions: Prepare an income statement and a retained earnings statement for Lansing Company.
(Points : 30)

     

4. (TCO D) Your friend James has hired you to evaluate the following internal control procedures.

a) Explain to your friend whether each of the numbered items below is an internal control strength or weakness. You must also state which principle relates to each of the internal controls.

b) For the weaknesses, you also need to state a recommendation for improvement.

Everyone has access to the petty cash fund.
Cash register codes are assigned to each cashier.
The treasurer is the only one allowed to sign checks.
Supervisors count cash receipts daily.
The treasurer approves of the purchases and makes the payment because he is familiar with the purchases.
(Points : 30)

     

5. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be debited with the abbreviation DR in front of the account name and which account should be credited with the abbreviation CR in front of the account name along with the dollar amount of the debit and credit.

a) Investors invested $150,000 in exchange for 10,000 shares of common stock.
b) Company made payment on account for $10,000
c) Company received $15,000 for services not yet performed
d) Company purchased $7,500 worth of equipment
e) Company billed $5,000 for services performed
(Points : 30)

Answer:
(a) DR. Cash, $150,000 ..... CR. Common Stock, $150,000
(b) DR. Accounts Payable'$ 10,000….. CR. Cash (or bank account)' $ 10,000
(c) DR. Cash, $15,000 ..... CR. Unearned Service Revenue, $15,000
(d) DR. Supplies, $7,500 ..... CR. Cash, $7,500
(e) DR. Accounts Receivable, $5,000 ..... CR. Service Revenue, $5,000     

6. (TCO C) Please indicate which section of the statement of cash flows should contain each of the following items and whether each item would result in an inflow or outflow of cash. The sections are Operating, Investing, and Financing.

a) Depreciation of equipment
b) Increase in accounts payable
c) Sold a building at book value
d) Payment of dividends 
e) Increase in inventory
(Points : 30)