1.Cash flows from operating activities, as part of the statement of cash flows, include cash transactions that enter into the determination of net income. a True b. False 2. Esters Bunny Barn has experienced a $40,000 loss due to tornado damage to its inventory. Tornados have never before occurred in this area. Assuming that the companys tax rate is 30%, what amount will be reported for this loss on the income statement? a. $28,000 loss from discontinued operations b. $28,000 loss from extraordinary items c. $40,000 loss from discontinued operations d. $40,000 loss from extraordinary items 3. The acquisition of land by issuing common stock is (a). a noncash transaction which is not reported in the body of a statement of cash flows. (b). a cash transaction and would be reported in the body of a statement of cash flows. (c). a noncash transaction and would be reported in the body of a statement of cash flows. (d). only reported if the statement of cash flows is prepared using the direct method. 4. Cash receipts from interest and dividends are classified as (a). financing activities. (b). investing activities. (c). operating activities. (d). either financing or investing activities 5. An event or transaction should be classified as an extraordinary item if it is unusual in nature or if it occurs infrequently. a True b. False 6. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in (a). the financing section. (b). the "extraordinary" section. (c). a separate schedule or note to the financial statements. (d). the stockholders' equity section. 7. There are two alternatives to reporting cash flows from operating activities in the statement of cash flows: (1) the direct method and (2) the indirect method. a True b. False 8. Wilton Company reported net income of $40,000 for the year. During the year, accounts receivable decreased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is a. $30,000. b. $55,000. c. $39,000. d. $35,000 9. In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total liabilities and stockholders' equity. d. prepaid expenses. 10. Assume the following sales data for a company: 2010 $1,000,000 2009 900,000 2008 750,000 2007 600,000 If 2007 is the base year, what is the percentage increase in sales from 2007 to 2008? a. 100% b. 150% c. 25% d. 66.7% 11. Moon Beam, Inc. has the following income statement (in millions): MOON BEAM, INC. Income Statement For the Year Ended December 31, 2008 Net Sales $180 Cost of Goods Sold 120 Gross Profit 60 Operating Expenses 33 Net Income $ 27 Using vertical analysis, what percentage is assigned to Cost of Goods Sold? a. 67% b. 33% c. 100% d. None of the above 12. Using the indirect method, if land costing $85,000 was sold for $145,000, the amount reported in the financing activities section of the statement of cash flows would be $85,000. a True b. False 13. Factors which reflect the ability of a business to pay its debts and earn a reasonable amount of income are referred to as solvency and profitability. a True b. False 14. If a gain of $11,000 is realized in selling (for cash) office equipment having a book value of $55,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $44,000 b. $11,000 c. $55,000 d. $66,000 15. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been acceleration in the collection of receivables. a True b. False 16. The net income reported on the income statement for the current year was $275,000. Depreciation recorded on fixed assets and amortization of patents for the year was $40,000 and $9,000, respectively. Balances of current asset and current liability accounts at the end and at the beginning of the year are as follows: End Beginning Cash $ 50,000 $ 60,000 Accounts receivable 112,000 108,000 Inventories 105,000 93,000 Prepaid expenses 4,500 6,500 Accounts payable (merchandise creditors) 75,000 89,000 What is the amount of cash flows from operating activities reported on the statement of cash flows prepared by the indirect method? a. $198,000 b. $324,000 c. $352,000 d. $296,000 17. A company with $70,000 in current assets and $50,000 in current liabilities pays a $1,000 current liability. As a result of this transaction, the current ratio and working capital will a. both decrease. b. both increase. c. increase and remain the same, respectively. d. remain the same and decrease, respectively. 18. If $475,000 of bonds payable are sold at 101, $475,000 would be reported in the cash flows from financing activities section of the statement of cash flows. a True b. False 19. On the statement of cash flows, a $7,500 gain on the sale of fixed assets would be a. added to net income in converting the net income reported on the income statement to cash flows from operating activities b. deducted from net income in converting the net income reported on the income statement to cash flows from operating activities c. added to dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends d. deducted from dividends declared in converting the dividends declared to the cash flows from financing activities related to dividends 20. Cash dividends of $45,000 were declared during the year. Cash dividends payable were $10,000 at the beginning of the year and $15,000 at the end of the year. The amount of cash for the payment of dividends during the year is and would be reported in the a. $50,000; financing section b. $40,000; financing section c. $55,000; operating section d. $35,000; investing section BONUS +2.5 POINTS The following information is available for Taylor Company: 2012 Market price per share of common stock $25.00 Earnings per share on common stock $ 1.25 Which of the following statements is correct? a. The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of 2012. b. The price-earnings ratio is 5.0% and a share of common stock was selling for 5.0% more than the amount of earnings per share at the end of 2012. c. The price-earnings ratio is 10 and a share of common stock was selling for 125 times the amount of earnings per share at the end of 2012. d. The market price per share and the earnings per share are not statistically related to each other. Problems Please complete the following problems. Make certain to show all of your work. I. Statement of Cash Flows (25 points) A comparative balance sheet for Lyon Company appears below: LYON COMPANY Comparative Balance Sheet Dec. 31, 2008 Dec. 31, 2007 Assets Cash $ 23,000 $10,000 Accounts receivable 18,000 14,000 Inventory 27,000 18,000 Prepaid expenses 6,000 9,000 Long-term investments -0- 18,000 Equipment 60,000 32,000 Accumulated depreciationequipment (18,000) (14,000) Total assets $116,000 $87,000 Liabilities and Stockholders' Equity Accounts payable $ 17,000 $ 7,000 Bonds payable 37,000 47,000 Common stock 40,000 23,000 Retained earnings 22,000 10,000 Total liabilities and stockholders' equity $116,000 $87,000 Additional information: 1. Net income for the year ending December 31, 2008 was $24,000. 2. Cash dividends of $12,000 were declared and paid during the year. 3. Long-term investments that had a cost of $18,000 were sold for $16,000. 4. No plant assets were sold during the year. Instructions Prepare a statement of cash flows (see below) for the year ended December 31, 2008, using the indirect method. LYON COMPANY Statement of Cash Flows For the Year Ended December 31, 2008 Type the amount on the left side of the box shown Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of long-term investments Increase in accounts receivable Decrease in prepaid expenses Increase in inventories Increase in accounts payable Net cash provided by operating activities Cash flows from investing activities Sale of long-term investments Purchase of equipment Net cash used by investing activities Cash flows from financing activities Issuance of common stock Retirement of bonds payable Payment of cash dividends Net cash used by financing activities Net increase in cash Cash at beginning of period Cash at end of period $____________ II. Financial Analysis (25 points) The financial statements of Dobson Company appear below: DOBSON COMPANY Comparative Balance Sheet December 31, 2009 Assets 2009 2008 Cash $ 35,000 $ 40,000 Short-term investments 15,000 60,000 Accounts receivable (net) 50,000 30,000 Inventory 50,000 70,000 Property, plant and equipment (net) 250,000 300,000 Total assets $400,000 $500,000 Liabilities and stockholders' equity Accounts payable $ 10,000 $ 30,000 Short-term notes payable 40,000 90,000 Bonds payable 88,000 160,000 Common stock 160,000 145,000 Retained earnings 102,000 75,000 Total liabilities and stockholders' equity $400,000 $500,000 DOBSON COMPANY Income Statement For the Year Ended December 31, 2009 Net sales $360,000 Cost of goods sold 198,000 Gross profit 162,000 Expenses Interest expense $12,000 Selling expenses 40,000 Administrative expenses 59,000 Total expenses 111,000 Income before income taxes 51,000 Income tax expense 15,000 Net income $ 36,000 Additional information: a. Cash dividends of $9,000 were declared and paid in 2009. b. Weighted-average number of shares of common stock outstanding during 2009 was 30,000 shares. c. Market value of common stock on December 31, 2009, was $21 per share. Instructions Using the financial statements and additional information above, compute the following ratios for Dobson Company for 2009. Show all computations. (Round ratios to 2 decimal places and percentages to 1 decimal place.) 1. Current ratio _________. 5. Inventory Turnover ____________. 2. Earnings per share _________. 6. Number of days sales in inventory _________. 3. Price-earnings ratio _________. 7. Accounts receivable turnover _________. 4. Quick (Acid-test) ratio _________. 8. Ratio of net sales t