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financial accounting for decision makers

Questions and Answers of Financial Accounting For Decision Makers

Which measure is an evaluation of a firm's abil- ity to pay current liabilities? (a) Acid-test ratio (b) Current ratio (c) Both (a) and (b) (d) None of the above
Which measure is useful in evaluating the ef- ficiency in managing inventories? (a) Inventory turnover ratio (b) Average days in inventory (c) Both (a) and (b) (d) None of the above
Plano Corporation reported net income $24,000; net sales $400,000; and average assets $600,000 for 1998. What is the 1998 profit margin? (a) 6% (b) 12% (c) 40% (d) 200%
Explain earning power. What relationship does thisconcept have to the treatment of irregular items onthe income statement?
Indicate which of the following items would be re-ported as an extraordinary item on Fine \& FancyFood Corporation's income statement?(a) Loss from damages caused by a volcano erup-tion(b) Loss from
Iron Ingots Inc. reported 1997 earnings per share of\(\$ 3.26\) and had no extraordinary items. In 1998 earn-ings per share on income before extraordinary itemswas \(\$ 2.99\), and earnings per share
Rodger Robotics Inc. has been in operation for 3years. All of its manufacturing equipment, which hasa useful life of 10 to 12 years, has been depreciatedon a straight-line basis. During the fourth
(a) Tia Kim believes that the analysis of financialstatements is directed at two characteristics of acompany: liquidity and profitability. Is Tia cor-rect? Explain.(b) Are short-term creditors,
(a) If Roe Company had net income of \(\$ 540,000\) in1997 and it experienced a \(24.5 \%\) increase in netincome for 1998 , what is its net income for 1998?(b) If six cents of every dollar of Roe's
Tony Robins is puzzled. His company had a profitmargin of \(10 \%\) in 1998. He feels that this is an indi-cation that the company is doing well. Joan Graham,his accountant, says that more
Gerry Bullock Company, a retail store, has a receiv-ables turnover ratio of 4.5 times. The industry aver-age is 12.5 times. Does Bullock have a collectionproblem with its receivables?
The price-earnings ratio of McDonnell Douglas (air-craft builder) was 5 , and the price-earnings ratio ofMicrosoft (computer software) was 43. Which com-pany did the stock market favor? Explain.
The return on assets for Windsor Corporation is\(7.6 \%\). During the same year Windsor's return on com-mon stockholders' equity is \(12.8 \%\). What is the ex-planation for the difference in the two
Which two ratios do you think should be of greatestinterest in each of these cases:(a) A pension fund considering the purchase of 20 -year bonds(b) A bank contemplating a short-term loan(c) A common
Khris Inc. has net income of \(\$ 270,000\), weighted av-erage shares of common stock outstanding of 50,000and preferred dividends for the period of \(\$ 40,000\).What is Khris's earnings per share
Explain how the choice of one of the following ac-counting methods over the other raises or lowers acompany's net income during a period of continuinginflation.(a) Use of FIFO instead of LIFO for
Refer to the financial statements and the Notes to Consolidated Financial Statements of Starbucks, Inc., in Appendix A.\section*{Instructions}Answer the following questions:(a) What were the total
The financial statements of Green Mountain Coffee are presented in Appendix B, following the financial statements for Starbucks in Appendix A.\section*{Instructions}(a) Based on the information in
The December 18, 1995, issue of Forbes includes an article by Rita Koselka entitled "Tall Story."\section*{Instructions}Read the article and answer these questions:(a) What is the biggest expense in
Minicase 1 Microsoft vs. Oracle}As noted in the chapter, most expenditures for research and development must be expensed. One exception is that computer software companies are allowed to capitalize
Minicase 2 Merck vs. Johnson \& Johnson}Merck and Co., Inc., and Johnson \& Johnson are two leading producers of health care products. Each has considerable assets, and each expends
Minicase 3 Boeing vs. McDonnell Douglas Boeing and McDonnell Douglas are two leaders in the manufacture of aircraft. In 1996 Boeing announced intentions to acquire McDonnell Douglas and create one
Tammy Company and Hamline Company are two proprietorships that are similar in many respects except that Tammy Company uses the straight-line method and Hamline Company uses the declining-balance
Clark Equipment Company was originally formed in 1902 as a general manufacturing company. During its history it has specialized in the manufacture of drills, gears, towing tractors, and truck
With the class divided into three groups, each group should be assigned one of these depreciation methods: straight-line, units-of-activity, declining-balance.\section*{Instructions}(a) Think of an
The chapter presented some concerns regarding the current accounting standards for research and development expenditures.\section*{Instructions}Pretend that you are either (a) the president of a
Imporia Container Company is suffering declining sales of its principal product, nonbiodegradable plastic cartons. The president, Benny Benson, instructs his controller, John Straight, to lengthen
Purpose: Use an annual report to identify a company's plant asset and the depreciation method used.Address: http://www.reportgallery.com Steps:1. From Report Gallery Homepage, choose Viewing
The time period for classifying a liability as current is 1 year or the operating cycle, whichever is:(a) longer.(c) probable.(b) shorter.(d) possible.
To be classified as a current liability, a debt (SO 1) must be expected to be paid:(a) out of existing current assets.(b) by creating other current liabilities.(c) within 2 years.(d) Either (a) or (b)
Julie Gilbert Company borrows \(\$ 88,500\) on September 1, 1998, from Sandwich State Bank by signing an \(\$ 88,500,12 \%\), 1-year note. What is the accrued interest at December 31, 1998?(a) \(\$
Reeves Company has total proceeds from sales of \(\$ 4,515\). If the proceeds include sales taxes of \(5 \%\), what is the amount to be credited to Sales?(a) \(\$ 4,000\)(b) \(\$ 4,300\)(c) \(\$
What term is used for bonds that are unsecured?(a) Callable bonds(b) Indenture bonds(c) Debenture bonds(d) Sinking fund bonds
On January 1 Hurley Corporation issues \(\$ 500,000\), 5 -year, \(12 \%\) bonds at 96 with interest payable on July 1 and January 1. The entry on July 1 to record payment of bond interest and the
For the bonds issued in question 7, what is the carrying value of the bonds at the end of the third interest period?(a) \(\$ 486,000\)(c) \(\$ 472,000\)(b) \(\$ 488,000\)(d) \(\$ 464,000\)
Which of the following would not be included in the numerator of the acid-test ratio?(a) Accounts receivable(b) Cash(c) Marketable securities(d) Inventory
Which of the following is not a measure of liquidity?(a) Debt to total assets ratio(b) Working capital(c) Current ratio(d) Acid-test ratio
In a recent year Kennedy Corporation had net income of \(\$ 150,000\), interest expense of \(\$ 30,000\), and tax expense of \(\$ 20,000\). What was Kennedy Corporation's times interest earned ratio
Li Feng believes a current liability is a debt that can be expected to be paid in 1 year. Is Li correct? Explain.
Rio Grande Company obtains \(\$ 25,000\) in cash by signing a \(9 \%, 6\)-month, \(\$ 25,000\) note payable to First Bank on July 1. Rio Grande's fiscal year ends on September 30. What information
(a) Your roommate says, "Sales taxes are reported as an expense in the income statement." Do you agree? Explain(b) Hard Walk Cafe has cash proceeds from sales of \(\$ 10,400\). This amount includes
Aurora University sold 10,000 season football tickets at \(\$ 90\) each for its five-game home schedule. What entries should be made (a) when the tickets are sold and (b) after each game?
Contrast these types of bonds:(a) Secured and unsecured(b) Term and serial(c) Convertible and callable
Explain each of these important terms in issuing bonds:(a) Face value(b) Contractual interest rate(c) Bond indenture(d) Bond certificate
Assume that Stoney Inc. sold bonds with a par value of \(\$ 100,000\) for \(\$ 104,000\). Was the market interest rate equal to, less than, or greater than the bonds' contractual interest rate?
Barbara Secord and Jack Dalton are discussing how the market price of a bond is determined. Barbara believes that the market price of a bond is solely a function of the amount of the principal
If a \(10 \%, 10\)-year, \(\$ 600,000\) bond is issued at par and interest is paid semiannually, what is the amount of the interest payment at the end of the first semiannual period?
Jennifer Brent Corporation issues \(\$ 200,000\) of \(8 \%\), 5 -year bonds on January 1, 1998, at 104. Assuming that the straight-line method is used to amortize the premium, what is the total
Michael Feldman says that liquidity and solvency are the same thing. Is he correct? If not, how do they differ?
Tom Dodge needs a few new trucks for his business. He is considering buying the trucks but is concerned that the additional debt he will need to borrow will make his liquidity and solvency ratios
Lincoln Corporation has a current ratio of 1.1. Joe Investor has always been told that a corporation's current ratio should exceed 2.0. Lincoln argues that its ratio is low because it has a minimal
What is the primary difference between the nature of an operating lease and a capital lease? What is the difference in how they are recorded?
Fresno Company has these obligations at December 31: (a) a note payable for \(\$ 100,000\) due in 2 years, (b) a 10-year mortgage payable of \(\$ 200,000\) payable in ten \(\$ 20,000\) annual
Romez Company borrows \(\$ 60,000\) on July 1 from the bank by signing a \(\$ 60,000\), \(10 \%\), 1-year note payable. Prepare the journal entries to record (a) the proceeds of the note and (b)
Grandy Auto Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is \(\$ 9,975\). All sales are subject to a \(5 \%\) sales tax. Compute sales taxes
Outstanding University sells 3,000 season basketball tickets at \(\$ 60\) each for its 12 -game home schedule. Give the entry to record (a) the sale of the season tickets and (b) the revenue earned
Olga Inc. is considering these two alternatives to finance its construction of a new \(\$ 2\) million plant:(a) Issuance of 200,000 shares of common stock at the market price of \(\$ 10\) per
Keystone Corporation issued 1,000 9\%, 5-year, \(\$ 1,000\) bonds dated January 1, 1998 , at 100 .(a) Prepare the journal entry to record the sale of these bonds on January 1, 1998.(b) Prepare the
The balance sheet for Hathaway Company reports the following information on July 1, 1998Hathaway decides to redeem these bonds at 102 after paying semiannual interest. Prepare the journal entry to
Dominic Company issues \(\$ 2\) million, 10 -year, \(9 \%\) bonds at 98 , with interest payable on July 1 and January 1. The straight-line method is used to amortize bond discount.(a) Prepare the
Hercules Inc. issues \(\$ 5\) million, 5 -year, \(10 \%\) bonds at 103 , with interest payable on July 1 and January 1. The straight-line method is used to amortize bond premium.(a) Prepare the
Presented here are long-term liability items for Warner Company at December 31, 1998. Prepare the long-term liabilities section of the balance sheet for Warner Company. Bonds payable, due 2001
Motorola's 1995 financial statements contain the following selected data (in millions):Compute these values:(a) Working capital (d) Debt to total assets ratio (b) Current ratio (e) Times interest
In a recent year, Southwest Airlines reported \(\$ 2,893,726,000\) in required pay-Calculate debt to total assets ments on operating leases. If these assets had been purchased with debt, assets and
Cairo Company on June 1 borrows \(\$ 50,000\) from First Bank on a 6-month, \(\$ 50,000,12 \%\) note.\section*{Instructions}(a) Prepare the entry on June 1.(b) Prepare the adjusting entry on June
In providing accounting services to small businesses, you encounter the following situations pertaining to cash sales:1. Nash Company rings up sales and sales taxes separately on its cash register.
Westland Company publishes a monthly sports magazine, Fishing Preview. Subscriptions to the magazine cost \(\$ 24\) per year. During November 1998 Westwood sells 6,000 subscriptions beginning with
Sundown Airlines is considering these two alternatives for financing the purchase of a fleet of airplanes:1. Issue 60,000 shares of common stock at \(\$ 45\) per share. (Cash dividends have not been
On January 1 Laramie Company issued \(\$ 90,000,10 \%, 10\)-year bonds at face value. Interest is payable semiannually on July 1 and January 1. Interest is not accrued on June
Pueblo Company issued \(\$ 240,000,9 \%, 20\)-year bonds on January 1, 1998, at 103 . Interest is payable semiannually on July 1 and January 1. Pueblo uses straight-line amortization for bond premium
Cotter Company issued \(\$ 180,000,11 \%, 10\)-year bonds on December 31, 1997, for \(\$ 172,000\). Interest is payable semiannually on June 30 and December 31. Cotter uses the straight-line method
The situations presented here are independent.\section*{Instructions}For each situation prepare the appropriate journal entry for the redemption of the bonds.(a) Ernst Corporation retired \(\$
The adjusted trial balance for Viola Corporation at the end of the current year contained these accounts:\section*{Instructions}(a) Prepare the long-term liabilities section of the balance sheet.(b)
McDonald's 1995 financial statements contain the following selected data (in millions):\section*{Instructions}(a) Compute these values:(1) Working capital (4) Debt to total assets ratio (2) Current
The following financial data were reported by Minnesota Mining and Manu-Calculate current and acidtest ratios before and after paying accounts payable.(SO 4) facturing (3M) for 1996 and 1995 (\$ in
On January 1, 1998, the ledger of El Paso Company contained these liability accounts:During January the following selected transactions occurred:Jan. 5 Sold merchandise for cash totaling \(\$
The following are selected transactions of Christianson Company, which prepares financial statements quarterly:Jan. 2 Purchased merchandise on account from Thompson Company, \(\$ 25,000\) terms \(2 /
San Diego Company sold \(\$ 1,500,000,12 \%, 10\)-year bonds on July 1, 1998. The bonds were dated July 1, 1998, and pay interest July 1 and January 1. San Diego Company uses the straight-line method
The following section is taken from Walenda Oil Company's balance sheet at December 31, 1998:Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual
Montego Electric sold \(\$ 3,000,000,10 \%, 20\)-year bonds on January 1, 1998. The bonds were dated January 1 and pay interest on July 1 and January 1. The bonds were sold at 104. Assume no interest
On January 1, 1998, the ledger of Calcutta Company contained these liability accounts:During January the following selected transactions occurred:Jan. 1 Borrowed \(\$ 15,000\) in cash from Midland
The following are selected transactions of Eldorado Company, which prepares financial statements quarterly:Jan. 2 Purchased merchandise on account from McCoy Company, \(\$ 15,000\), terms \(2 / 10,
Beatrice Corporation sold \(\$ 1,500,000,8 \%, 10\)-year bonds on January 1, 1998. The bonds were dated January 1, 1998, and pay interest on July 1 and January 1. Beatrice Corporation uses the
The following section is taken from Bermuda Corp.'s balance sheet at December 31, 1998:\section*{Instructions}(Round all computations to the nearest dollar.)(a) Journalize the payment of bond
Moriarity Company sold \(\$ 4,000,000,9 \%, 20\)-year bonds on January 1, 1998. The bonds were dated January 1, 1998, and pay interest on December 31 and June 30. The bonds were sold at 97. Assume no
Refer to the financial statements of Starbucks and the Notes to Consolidated Financial Statements in Appendix A.\section*{Instructions}Answer these questions about current and contingent liabilities
The financial statements of Green Mountain Coffee are presented in Appendix B, following the financial statements for Starbucks in Appendix A.\section*{Instructions}(a) Based on the information
The November 6, 1995, edition of The Wall Street Journal contains an article by Linda Sandler entitled "Kmart Is Pressured Over Obscure Bond 'Puts,' Which Stir Worries Amid Tough Retail
Minicase 1 Texas Instruments}Texas Instruments designs and produces devices that use semiconductor technology. You may have one of its calculators on your desk. Because it is in a high-tech industry,
Minicase 2 Northland Cranberries}Despite being a publicly traded company only since 1987, Northland Cranberries of Wisconsin Rapids, Wisconsin, is the world's largest cranberry grower. It has engaged
Minicase 3 Didde Industries, Inc.}Presented below is the long-term debt portion of the notes to the financial statements of Didde Industries, Inc.Certain borrowings are collateralized by property,
On January 1, 1996, Jerry Mall Corporation issued \(\$ 1,200,000\) of 5 -year, \(8 \%\) bonds at 97; the bonds pay interest semiannually on July 1 and January 1. By January 1, 1998, the market rate
Apache Corporation is an international, independent energy enterprise engaged in the exploration, development, production, gathering, processing, and marketing of natural gas and crude oil. Its
There are six topics in the section on types of current liabilities: notes payable, sales taxes payable, payroll and payroll taxes payable, unearned revenues, current maturities of long-term debt,
The text explains that bonds may be issued at (1) face value, (2) a discount, and (3) a premium.\section*{Instructions}With the class divided into three groups, each group should choose one type of
Finn Berge, president of the Blue Marlin, is considering the issuance of bonds to finance an expansion of his business. He has asked you to (1) discuss the advantages of bonds over common stock
Andy Vicks is the president, founder, and majority owner of Custom Medical Corporation, an emerging medical technology products company. Custom Medical is in dire need of additional capital to keep
Purpose: Bond or debt securities pay a stated rate of interest. This rate of interest is dependent on the risk associated with the investment. Moody's Investment Service provides ratings for
Purpose: To illustrate the time value of money. If you want to see how long it will take to reach your financial goals, try using "Investing for Kids Java Goals Calculator." (Don't be put off by the
Which of these statements is false?(a) Ownership of common stock gives the owner a voting right.(b) The stockholders' equity section begins with paid-in capital.(c) The authorization of capital stock

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