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ACCT 3331 Topics to know for Exam I Chapter 1 & 2 - Financial Accounting Standards and Conceptual Framework Know the basic objectives financial reporting and the basic elements of financial statement Know the fundamental and enhancing qualitative characteristics of accounting information. Know the assumptions, principles and constraints of accounting information and be able to identify when each is being illustrated in specific accounting contexts. Chapter 3 - The Accounting Information System Be able to prepare and/or answer questions related to journal entries, adjusting journal entries, and closing entries. Be able to reconstruct an event or adjustment when information is missing or not given in chronological order. This may require using end of period information and cash receipt/disbursement information to reconstruct the event or adjustment needed. Chapter 4 - Income Statement Know how to format an income statement when discontinued operations are present. Know how to report unusual or infrequent items on the income statement. Be able to do the income statement reporting of discontinued operations (when discontinued operations are sold in the reporting period and when they are held for sale, both with tax effects). Know how to report noncontrolling interest. Chapter 5 - Balance Sheet and Statement of Cash Flows Be able to prepare and/or answer questions related to a classified balance sheet in good form. Know useful characteristics of the balance sheet and the limitations of the balance sheet. Know how cash flows should be labeled on the statement of cash flows (operating, investing or financing) and be able to prepare a statement of cash flows using the direct method and indirect method. Chapter 18 - Revenue Recognition Know the five-step process for revenue recognition. Know how to estimate variable consideration in order to determine transaction price and how to allocate transaction price to separate performance obligations. Accounting for long term contracts under the percentage of completion method and completed contract method of accounting for long term contracts (including scenarios with current losses or overall contract losses) 0 Chapter 7 - Cash and Receivables Accounting for cash discounts (gross and net method) Estimating and recording bad debt expense (Income statement approach and balance sheet approach with single bad debt rate or multiple bad debt rates based on age of specific receivables) Recording write-offs of actual bad debts Using the transactions that affect A/R and A.D.A to solve for an unknown amount Accounting for interest bearing notes receivable The exam will be a combination of questions requiring short written responses and problems requiring calculations and/or appropriate journal entries or financial statement presentation. You will have 2 hour to complete the exam. The following sample exam reflects a random draw of questions from the material from Chapters 1-5, Chapter 18 and Chapter 7 that you are expected to know. This sample exam is intended as a practice test to help you identify areas of weakness once you have studied all of the material listed above. The sample exam is not a guide of what to study. 1 ACCT 3331 SAMPLE EXAM 1 NAME_____________________________________________ Question I II III IV V VI VII VIII IX TOTAL Topic Conceptual Framework Adjusting entries Closing Entries Balance Sheet Presentation of Income Statement Statement of Cash Flows Revenue Recognition Long Term Contract Accounts Receivable Total Points Assigned 10 14 6 14 12 14 12 8 10 100 Your Points PLEASE NOTE: 1. This examination consists of 7 pages, including the cover page. Please check immediately to be certain that all pages are included. 2. Show all your work and calculations. I cannot give partial credit if I cannot see the work you have done. Use the margins and back of the paper for any calculations. 3. Good luck! 2 I. Conceptual Framework (10 points) REQUIRED: Provide short answers for questions 1-3 in the space provided. 1. What are the two fundamental qualitative characteristics of accounting information as defined in SFAC No. 8? 1). ______________________________________ 2). ______________________________________ 2. What are the four enhancing qualitative characteristics of accounting information as defined in SFAC No. 8? 1). ____________________________________ 2). ____________________________________ 3)._____________________________________ 4). _____________________________________ 3. Land was acquired in 2000 for a future building site at a cost of $40,000. The assessed valuation for tax purposes is $27,000, a qualified appraiser placed its value at $48,000, and a recent firm offer for the land was for a cash payment of $46,000. The land should be reported in the financial statements at what dollar amount? REQUIRED: In the space provided, give the basic assumption, broad accounting principle or pervasive constraint that applies to each statement (give only the one answer that best applies to the statement) 4. Liquidation values are not normally reported in financial statements even though many companies do go out of business. ________________________________________ 5. The Parker Corporation does not adjust the valuation of assets and liabilities to reflect changes in the purchasing power of the dollar. _________________________________________ 6. In a typical reporting period, a manufacturing company records revenue from selling a product and also records the cost of goods sold on the sale. _________________________________________ 3 II. Adjusting Entries (14 points) REQUIRED: For each situation (questions 1-5), prepare the necessary adjusting entry as of December 31, 2013. Assume that each firm adjusts and closes its books only on an annual basis. If no adjusting journal entry is necessary, then write \"no adjusting entry\" in the space provided. 1. On September 1, 2013, Carlisle Inc. paid $10,200 for a two-year fire insurance policy and debited the entire amount to insurance expense. Account name Debit Credit 2. On January 1, 2013, Darline Trucking Corp. purchased equipment for $160,000. The equipment has an 8-year useful life and no estimated residual value. Straight-line depreciation is used. Account name Debit Credit 3. On March 1, 2013, the Star Printing Company received a $45,000 payment for annual magazine subscriptions (the subscriptions run from the March, 2013 edition through the February 2014 edition). Upon receipt of the payment, Star Printing credited the amount to sales revenue. Account name Debit Credit 4. On October 1, 2013, S&P Company borrowed $100,000 from the bank. The note requires principal and interest at 11% to be paid on April 30, 2014. Account name Debit Credit 5. Aventine Corporation made sales on credit in 2013 totaling $80,000. Management estimates a bad debt rate of percent of credit sales. At January 1, 2013, the balance in allowance for doubtful accounts was a credit balance of $1,000. There were no actual bad debt write-offs in 2013. Account name Debit Credit 4 III. Closing Entries (6 points) The adjusted trial balance for Knit Right Corp. at December 31, 2013 is as follows: dr. Sales Revenue Accounts receivable Cash Prepaid rent (for 4 months remaining) Rent expense Allowance for uncollectible accounts Accounts Payable Inventory Cost of goods sold Notes payable Salaries Payable Interest Payable Salary expense Interest expense Unearned Revenue Common stock Retained earnings Equipment Accumulated depreciation Depreciation expense Totals cr. $535,000 150,000 72,000 10,000 30,000 6,000 140,000 65,000 400,000 60,000 28,000 2,000 83,000 24,000 23,000 250,000 300,000 800,000 320,000 30,000 $1,664,000 $1,664,000 REQUIRED: Prepare Closing Entries (Use an Income Summary Account) Account name Debit Credit 5 IV. The Balance Sheet (14 points) The post-closing trial balance for ABC Corp. at December 31, 2013 is as follows: Cash Accounts receivable Inventory Prepaid rent (for 4 months remaining) Equipment Accumulated depreciation Allowance for uncollectible accounts Accounts payable Unearned revenue Notes payable Salaries payable Interest payable Common stock Retained earnings Totals dr. $ 21,000 300,000 53,500 10,000 600,000 $984,500 cr. 250,000 20,000 40,000 2,800 60,000 8,000 2,700 400,000 201,000 $984,500 Additional information: The $60,000 note payable is an installment loan. $10,000 of the principal, plus 9% interest is due each July 1 until maturity. Unearned revenue relates to products that will ship in early 2014. REQUIRED: Questions 1-5 below relate to the information presented on the balance sheet of ABC as of December 31, 2013. Fill in the blank with the appropriate amount. 1. What is the amount that would be reported as total current assets on the 2013 balance sheet? Total Current Assets 2. What is the amount that would be reported as total current liabilities on the 2013 balance sheet? Total Current Liabilities 3. What is the amount that would be reported as Net Accounts Receivable on the 2013 balance sheet? Net Accounts Receivable 4. What is the amount that would be reported as total shareholders' equity on the 2013 balance sheet? Total Shareholders' Equity 5. The balance in interest payable on the 2013 balance sheet is $2,700. What amount of interest payable would be reported on the 2014 balance sheet? Interest Payable 2014 Balance Sheet V. Presentation of the Income Statement (12 points) 6 The Rayburn Company had income from continuing operations before tax of $1,575,000 in 2014. Additional pre-tax transactions not included in the computation of the $1,575,000 are as follows: 1. In 2014, Rayburn decided to sell one of its manufacturing divisions, which qualifies as a discontinued operation for financial reporting purposes. On Nov. 1, 2014, the division assets were sold for $3,250,000. On the date of the sale, the division assets had a book value of $3,750,000. The discontinued division had a loss from operations from Jan. 1, 2014 through Nov. 1, 2014 of $200,000. 2. The sale of operational equipment resulted in a loss of $57,000. 3. Rayburn acquired 70% of the outstanding stock of Koch Co. and as such, consolidates Koch Co.'s financial results with its own. Koch Co. had net income of $300,000 in 2014 REQUIRED: Use all of the information above to prepare a 2014 income statement for the Rayburn Company beginning with income from continuing operations before tax. Assume an income tax rate of 40%. Provide full disclosure on the Income Statement, but ignore EPS disclosures. $ Income from Continuing Operations, pre-tax 7 VI. Statement of Cash Flows (14 points) 1. The Bolera Company had the following cash transactions during 2014. The Bolera Company uses the direct method of presenting the Statement of Cash Flows. REQUIRED: Fill in the following table by classifying the following transactions of the Bolera Company as cash flows from operating activities, investing activities or financing activities and identifying the cash flow as an inflow or outflow. Transaction Activity Inflow or classification? Outflow? Bolera made a cash payment to reduce accounts payable Bolera received the repayment of principal on a note Bolera received a cash interest payment Bolera paid dividends to its shareholders Bolera paid salaries Bolera sold investments in equity securities of IBM Corp. 2. The Rightway Company uses the indirect method of presenting the Statement of Cash Flows. At 12/31/2014, an investigation of their 2013 and 2014 Balance Sheets reveals that the balance in Net Accounts Receivable has decreased by $100,000 from 2013 to 2014 and the balance in Accounts Payable has decreased by $75,000 from 2013 to 2014. The balance in Net Property, Plant and Equipment has decreased by $15,000 and they noted that no property, plant or equipment was purchased or sold during 2014. REQUIRED: In the space provided, prepare the Operating Cash Flow Section of the 2014 Statement of Cash Flows for the Rightway Company by providing the adjustments to reconcile net income of $850,000 to net cash flows provided by operating activities. Statement of Cash Flows Rightway Company for the Year Ended December 31, 2014 Cash Flows From Operations: Net Income Adjustments to reconcile net income to net cash provided by operating activities: $ $850,000 VII. Revenue Recognition (12 points) 8 REQUIRED: Provide answers for questions 1-4 in the space provided. 1. What is the five-step process for revenue recognition? 2. On March 1, 2003, the Star Printing Company received a $45,000 payment for annual magazine subscriptions (the subscriptions run from the March, 2003 edition through the February 2004 edition). Upon receipt of the payment, Star Printing credited the amount to sales revenue. Provide any entries necessary to correctly state sales revenue on the 2003 income statement. Account name Debit Credit 3. Peabody Construction Company enters into a contract with a customer to build a warehouse for $100,000, with a performance bonus of $50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreedupon completion date. The contract requirements are similar to contracts that Peabody has performed previously, and management believes that such experience is predictive for this contract. Management estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and only a 10% probability that it will be completed 2 weeks late. How should Peabody account for this revenue arrangement? __________________________________________________________________________________ ________________________________________________________________________ 4. Handler Company is an experienced manufacturer of equipment used in the construction industry. Handler's products range from small to large individual pieces of automated machinery to complex 9 systems containing numerous components. Unit selling prices range from $600,000 to $4,000,000 and are quoted inclusive of installation and training. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Handler has the following arrangement with Chai Company. (1) Chai purchases equipment from Handler for a price of $2,000,000 and chooses Handler to do the installation. Handler charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000. (2) The fair value of the training sessions is estimated at $50,000. Other companies can also perform these training services. (3) Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the equipment. (4) Handler delivers the equipment on September 1, 2014, and completes the installation of the equipment on November 1, 2014 (transfer of control is complete). Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years. Required: (a) What are the performance obligations for purposes of accounting for the sale of the equipment? (b) If there is more than one performance obligation, how should the payment of $2,000,000 be allocated to various components? 10 VIII. Long Term Contract (8 points) Astra Construction Company contracted to build an office building for $3,000,000. Construction began in 2003 and was completed in 2005. Data relating to the contract are summarized below: 2003 700,000 1,800,000 900,000 800,000 Costs incurred during the year Estimated costs to complete as of 12/31 Billings during the year Cash collections during the year 2004 980,000 1,400,000 1,100,000 1,200,000 2005 1,400,000 0 1,000,000 1,000,000 What amount of income on the long term contract would Astra report in 2003, 2004 and 2005 if the firm uses the percentage of completion method of accounting for long term contracts? 2003 2004 2005 Income on Long Term Contract 11 IX. Accounts Receivable (10 points) Platinum Pools Company has the following information reported on its 2003 comparative Balance Sheet: 2003 2002 Accounts Receivable (less allowances for doubtful $958,000 $1,027,000 accounts of $14,000 in 2003 and $17,500 in 2002) Additional information: During 2003, Platinum wrote-off $20,000 of accounts that had been identified as uncollectible. Platinum makes all sales on account and collected $2,500,000 from customers in 2003. REQUIRED: Provide answers to questions 1-4 in the space provided. 1. Provide the journal entry that Platinum made during 2003 to record the write-off. Account name Debit Credit 2. What is the amount of Platinum's 2003 credit sales? 2003 Credit Sales 3. What is the amount that Platinum recorded as bad debt expense on its 2003 income statement? 2003 Bad debt expense 4. Assuming Platinum used a balance sheet approach with a single bad debt rate (rather than multiple rates from aging specific receivables) in estimating bad debt expense, what is the bad debt rate applied in 2003? 2003 Bad debt rate 12 Q1. For purposes of analysis, mixed costs are generally a. classified as fixed costs. b. classified as variable costs. c. classified as period costs. d. separated into their variable and fixed cost components. Q2. If direct materials cost per unit increases, the break-even point will increase. a. true b. false Q3. If sales are $300,000, variable costs are 60% of sales, and operating income is $40,000, what is the operating leverage? a. 3.000 b. 7.500 c. 1.875 d. 4.500 Q4. Winston Co. manufactures office furniture. During the most productive month of the year, 3,500 desks were manufactured at a total cost of $84,400. In its slowest month, the company made 1,100 desks at a cost of $46,000. Using the high-low method of cost estimation, total fixed costs are a. $56,000. b. $28,400. c. $17,600. d. $29,900. Q5. Which of the following conditions would cause the break-even point to increase? a. Total fixed costs increase b. Unit selling price increases c. Unit variable cost decreases d. Total fixed costs decrease Q6. Which of the following conditions would cause the break-even point to increase? a. Total fixed costs decrease b. Unit selling price increases c. Unit variable cost decreases d. Unit variable cost increases Q7. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. Such an analysis is called a. 'what if' or sensitivity analysis. b. vary the data analysis. c. computer-aided analysis. d. data gathering. Q8. If fixed costs are $220,000 and the unit contribution margin is $25, the sales necessary to earn an operating income of $30,000 are 10,000 units. a. true b. false Q9. Break-even analysis is one type of cost-volume-profit analysis. a. true b. false Q10. If variable costs per unit increased because of an increase in hourly wage rates, the break-even point would a. decrease. b. increase. c. remain the same. d. increase or decrease, depending upon the percentage increase in wage rates. Q11. Costs that remain constant on a per-unit level as the level of activity changes are called a. fixed costs. b. mixed costs. c. opportunity costs. d. variable costs. Q12. If the property tax rates are increased, this change in fixed costs will result in an increase in the break-even point. a. true b. false Q13. If direct materials cost per unit decreases, the break-even point will increase. a. true b. false Q14. Which ratio indicates the percentage of each sales dollar that is available to cover fixed costs and to provide a profit? a. Margin of safety ratio b. Contribution margin ratio c. Costs and expenses ratio d. Profit ratio Q15. Variable costs are costs that vary in total in direct proportion to changes in the activity level. a. true b. false Q16. If fixed costs are $850,000 and variable costs are 70% of sales, what is the breakeven point (in dollars)? a. $1,214,286 b. $1,983,333 c. $2,833,333 d. $2,550,000 Q17. Variable costs are costs that remain constant in total with changes in the activity level. a. true b. false Q18. If fixed costs are $810,000, the unit selling price is $60, and the unit variable costs are $48, what is the break-even sales (in units) if fixed costs are reduced by $50,000? a. 15,834 units b. 67,500 units c. 62,500 units d. 63,333 units Q19. Which of the following conditions would cause the break-even point to decrease? a. Total fixed costs increase b. Unit selling price decreases c. Unit variable cost decreases d. Unit variable cost increases Q20. If a business had sales of $4,000,000 and a margin of safety of 25%, what was the break-even point? a. $5,000,000 b. $3,000,000 c. $12,000,000 d. $1,000,000 Q21. The relevant range is useful for analyzing cost behavior for management decisionmaking purposes. a. true b. false Q22. Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio. a. true b. false Q23. The point where the profit line intersects the left vertical axis on the profit-volume chart represents a. the maximum possible operating loss. b. the maximum possible operating income. c. the total fixed costs. d. the break-even point. Q24. A rental cost of $40,000 plus $0.50 per machine hour of use is an example of a mixed cost. a. true b. false Q25. A mixed cost has characteristics of both a variable cost and a fixed cost. a. true b. false Q26. If a business sells four products, it is NOT possible to estimate the break-even point. a. true b. false Q27. If yearly insurance premiums are increased, this change in fixed costs will result in a decrease in the break-even point. a. true b. false Q28. If the volume of sales is $4,000,000 and sales at the break-even point amount to $3,200,000, the margin of safety is 20%. a. true b. false Q29. Cost behavior refers to the manner in which a cost changes as the related activity changes. a. true b. false Q30. If fixed costs are $850,000 and the unit contribution margin is $90, what amount of units must be sold in order to have a zero profit? a. 9,445 b. 8,500 c. 7,650 d. 85,000 Q31. The graph of a variable cost when plotted against its related activity base appears as a a. circle. b. rectangle. c. straight line. d. curved line. Q32. If a business had sales of $4,000,000, fixed costs of $1,200,000, a margin of safety of 25%, and a contribution margin ratio of 40%, what was the break-even point? a. $3,000,000 b. $2,800,000 c. $4,800,000 d. $2,000,000 Q33. The dollars available from each unit of sales to cover fixed cost and profit is the contribution margin per unit. a. true b. false Q34. If the minimum acceptable rate of return for investments exceeds the average rate of return on an asset, the asset should be purchased. a. true b. false Q35. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence with earnings at the rate of 12% a year: Year 1 2 3 4 6% .943 .890 .840 .792 10% .909 .826 .751 .683 12% .893 .797 .712 .636 a. $13,660 b. $15,840 c. $12,720 d. $10,400 Q36. Which of the following can be used to place capital investment proposals involving different amounts of investment on a comparable basis for purposes of net present value analysis? a. Price-level index b. Present value factor c. Annuity d. Present value index Q37. The internal rate of return method of analyzing capital investment proposals uses the present value concept to compute an internal rate of return expected from the proposals. a. true b. false Q38. Qualitative considerations are best evaluated using present value methods such as internal rate of return. a. true b. false Q39. The process by which management plans, evaluates, and controls long-term investment decisions involving fixed assets is called capital investment analysis. a. true b. false Q40. Capital rationing is the process by which management allocates funds among competing capital investment proposals. a. true b. false Q41. The amount of the estimated average income for a proposed investment of $60,000 in a fixed asset, giving effect to depreciation (straight-line method), with a useful life of four years, no residual value, and an expected total income yield of $22,300, is a. $10,800. b. $5,575. c. $5,400. d. $15,000. Q42. Internal rate of return is often called the payback rate of return. a. true b. false Q43. Methods that ignore present value in capital investment analysis include the cash payment method. a. true b. false Q44. When evaluating two competing proposals with unequal lives, management should give greater consideration to the investment with the longer life because the asset will be useful to the company for a longer period of time. a. true b. false Q45. The computations involved in the net present value method of analyzing capital investment proposals are more involved than those for the average rate of return method. a. true b. false Q46. When evaluating a proposal by use of the net present value method, if there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal exceeds the rate used in the analysis. a. true b. false Q47. Leasing assets may be a favorable alternative to purchasing assets if the asset has a high risk of becoming obsolete. a. true b. false Q48. The payback period is determined using which of the following formulas? a. Amount to be invested/Annual average net income b. Annual net cash flow/Amount to be invested c. Annual average net income/Amount to be invested d. Amount to be invested/Equal annual net cash flows Q49. In capital rationing, alternative proposals that survive initial and secondary screening are normally evaluated in terms of a. net income. b. nonfinancial factors. c. maximum cost. d. net cash flow. Q50. The process by which management plans, evaluates, and controls long- term investment decisions involving fixed assets is called cost-volume-profit analysis. a. true b. false Q51. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received four years hence, with earnings at the rate of 10% a year. Year 1 2 3 4 a. $13,660 6% .943 .890 .840 .792 10% .909 .826 .751 .683 12% .893 .797 .712 .636 b. $12,720 c. $15,840 d. $10,400 Q52. If the average rate of return on an asset exceeds the minimum acceptable rate of return for investments, the asset should be purchased. a. true b. false Q53. For years one through five, a proposed expenditure of $250,000 for a fixed asset with a 5-year life has expected net income of $40,000, $35,000, $25,000, $25,000, and $25,000, respectively, and net cash flows of $90,000, $85,000, $75,000, $75,000, and $75,000, respectively. The cash payback period is 2.5 years. a. true b. false Q54. A qualitative characteristic that may impact upon capital investment analysis is manufacturing productivity. a. true b. false Q55. When evaluating a proposal by use of the cash payback method, if net cash flows exceed the capital investment within the time deemed acceptable by management, the proposal should be accepted. a. true b. false Q56. If a proposed expenditure of $80,000 for a fixed asset with a 4-year life has an annual expected net cash flow and net income of $32,000 and $12,000, respectively, the cash payback period is 2.5 years. a. true b. false Q57. Using the following partial table of present value of $1 at compound interest, determine the present value of $20,000 to be received three years hence, with earnings at the rate of 10% a year. Year 1 2 3 4 6% .943 .890 .840 .792 10% .909 .826 .751 .683 12% .893 .797 .712 .636 a. $14,240 b. $16,800 c. $15,020 d. $15,840 Q58. A capital expenditures budget summarizes the decisions made for the acquisition of fixed assets for several future years. a. true b. false Q59. An analysis of a proposal by the net present value method indicated that the present value exceeded the amount to be invested. Which of the following statements best describes the results of this analysis? a. The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. b. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis. c. The proposal is undesirable and the rate of return expected from the proposal is less than the minimum rate used for the analysis. d. The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum rate used for the analysis. Q60. Decisions to install new equipment, replace old equipment, and purchase or construct a new building are examples of a. sales mix analysis. b. variable cost analysis. c. variable cost analysis. d. capital investment analysis. Q61. Care must be taken involving capital investment decisions since normally a long-term commitment of funds is involved and operations could be affected for many years. a. true b. false Q62. Which of the following is a present value method of analyzing capital investment proposals? a. Average rate of return b. Cash payback method c. Accounting rate of return d. Net present value Q63. Which of the following are present value methods of analyzing capital investment proposals? a. Internal rate of return and average rate of return b. Average rate of return and net present value c. Net present value and internal rate of return d. Net present value and payback Q64. The anticipated purchase of a fixed asset for $400,000, with a useful life of 5 years and no residual value, is expected to yield total net income of $300,000 for the 5 years. The expected average rate of return is 30%. a. true b. false Q65. In net present value analysis for a proposed capital investment, the expected future net cash flows are reduced to their present values. a. true b. false Q66. When evaluating a proposal by use of the net present value method, if there is an excess of the present value of future cash inflows over the amount to be invested, the rate of return on the proposal is less than the rate used in the analysis. a. true b. false Q67. The expected average rate of return for a proposed investment of $3,000,000 in a fixed asset giving effect to depreciation (straight-line method) with a useful life of 20 years, no residual value, and an expected total income of $6,000,000 is a. 25%. b. 18%. c. 40%. d. 20%. Q68. A company with $60,000 in current assets and $40,000 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. Q69. If a company has issued only one class of stock, the earnings per share is determined by dividing net income by the number of shares outstanding. a. true b. false Q70. An acceleration in the collection of receivables will tend to cause the accounts receivable turnover to a. decrease. b. remain the same. c. either increase or decrease. d. increase. Q71. The percentage analysis of increases and decreases in individual items in comparative financial statements is called a. vertical analysis. b. solvency analysis. c. profitability analysis. d. horizontal analysis. Q72. Balance sheet and income statement data indicate the following: Bonds payable, 12% (issued 1998, due 2022) Preferred 5% stock, $100 par (no change during year) Common stock, $50 par (no change during year) Income before income tax for year Income tax for year Common dividends paid Preferred dividends paid $1,000,000 300,000 2,000,000 300,000 80,000 50,000 15,000 Based on the data presented above, what is the number of times interest charges were earned (rounded to one decimal place)? a. 3.5 b. 2.2 c. 4.0 d. The answer cannot be determined. Q73. The relationship of each asset item as a percent of total assets is an example of horizontal analysis. a. true b. false Q74. Which of the following is a measure of the liquid position of a corporation? a. Earnings per share b. Inventory turnover c. Current ratio d. Number of times interest charges earned Q75. Ratios and various other analytical measures are NOT a substitute for sound judgment, nor do they provide definitive guides for action. a. true b. false Q76. Interpreting financial analysis should be considered in light of conditions peculiar to the industry and the general economic conditions. a. true b. false Q77. The excess of current liabilities over current assets is referred to as working capital. a. true b. false Q78. The following information is available for Morgan Corp.: Market price per share of common stock Earnings per share on common stock 2010 $25.00 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 2010. 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 2010. 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 2010. d. The market price per share and the earnings per share are not statistically related to each other. Q79. The ratio of the market price per share of common stock on a specific date to the annual earnings per share is referred to as the price-earnings ratio. a. true b. false Q80. The terms acid-test ratio and quick ratio refer to the same ratio--the instant debtpaying ability of a company. a. true b. false Q81. The effects of differences in accounting methods are of little importance when analyzing comparable data from competing businesses. a. true b. false Q82. The ability of a business to pay its debts as they come due and to earn a reasonable amount of income is referred to as a. solvency and leverage. b. solvency and profitability. c. solvency and liquidity. d. solvency and equity. Q83. An analysis in which all the components of an income statement are expressed as a percentage of net sales is called a. vertical analysis. b. horizontal analysis. c. liquidity analysis. d. common-size analysis. Q84. \"Working capital\" is another term for the current ratio. a. true b. false Q85. The ratio of current assets to current liabilities is referred to as the acid-test ratio. a. true b. false Q86. The ratio of the sum of cash, receivables, and marketable securities to current liabilities is called the a. price-earnings ratio. b. earnings ratio. c. quick ratio. d. current ratio. Q87. If the accounts receivable turnover for the current year has decreased when compared with the ratio for the preceding year, there has been an acceleration in the collection of receivables. a. true b. false Q88. Based on the following data for the current year, what is the accounts receivable turnover? Net sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year $ 500,000 300,000 45,000 35,000 90,000 110,000 a. 12.5 b. 14.3 c. 11.1 d. 7.5 Q89. The number of times interest charges are earned is computed as a. net income plus interest charges, divided by interest charges. b. income before income tax plus interest charges, divided by interest charges. c. net income divided by interest charges. d. income before income tax divided by interest charges. Q90. The ratio computed by dividing current assets by current liabilities is the a. current ratio. b. earnings ratio. c. acid-test ratio. d. quick ratio. Q91. Based on the following data for the current year, what is the inventory turnover? Net sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year $ 500,000 300,000 45,000 35,000 90,000 110,000 a. 3.0 b. 2.7 c. 4.0 d. 3.3 Q92. In computing the rate earned on total assets, interest expense is added to net income before dividing by average total assets. a. true b. false Q93. A balance sheet shows cash, $75,000; marketable securities, $110,000; receivables, $90,000; and $225,000 of inventories. Current liabilities are $200,000. The current ratio is 1.375 to 1. a. true b. false Q94. A company with working capital of $500,000 and a current ratio of 2.25 pays a $100,000 short-term liability. The amount of working capital immediately after payment is a. $600,000. b. $400,000. c. $500,000. d. $100,000. Q95. The ability of a business to earn a reasonable amount of income is referred to as the factor of a. leverage. b. profitability. c. wealth. d. solvency. Q96. Based on the following data for the current year, what is the inventory turnover? Net sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year $ 517,500 450,000 50,000 40,000 110,000 140,000 a. 7.2 b. 3.6 c. 3.2 d. 4.2 Q97. The percent of fixed assets to total assets is an example of a. vertical analysis. b. solvency analysis. c. profitability analysis. d. horizontal analysis. Q98. If a firm has an quick ratio of 1, the subsequent payment of an account payable will cause the ratio to increase. a. true b. false Q99. Based on the following data for the current year, what is the accounts receivable turnover? Net sales on account during year Cost of merchandise sold during year Accounts receivable, beginning of year Accounts receivable, end of year Inventory, beginning of year Inventory, end of year $ 525,500 375,000 50,000 40,000 110,000 140,000 a. 13.14 b. 11.7 c. 10.35 d. 8.3 Q100. The balance sheets at the end of each of the first two years of operations indicate the following: Total current assets Total investments Total property, plant, and equipment Total current liabilities Total long-term liabilities Preferred 9% stock, $100 par Common stock, $10 par Paid-in capital in excess of par--common stock Retained earnings 2011 $600,000 60,000 900,000 125,000 350,000 100,000 600,000 60,000 325,000 2010 $560,000 40,000 700,000 80,000 250,000 100,000 600,000 60,000 210,000 If net income is $130,000 and interest expense is $40,000 for 2011, and the market price is $40, what is the price-earnings ratio on common stock (rounded to one decimal place)? a. 14.9 b. 18.4 c. 17.3 d. 19.8 Dylan Corporation Question one Income statement Rent received for the year= $ 60,000 Rent to be earned per month= $ 5,000 At the end of the year 31/12/2013, the number of months from 01/08/2013= 5 months Therefore the rent revenue earned for the year ended 31/12/2013= 5* $ 5,000= $ 25,000 Income statement for the year ended 31/12/2013 Rent revenue earned $ 25,000 Balance sheet In a balance sheet the company will report unearned revenue as a current liability. The amount earned for year ended will be subtracted from the total rent received to get the unearned rent revenue. The unearned revenue= $ 60,000- $ 25,000 (earned rent revenue) = $ 35,000 Balance sheet as at 31/12/2013 Assets Cash $ 35,000 Liabilities and equity Unearned rent revenue $ 35,000 Question two Income statement Warranty that the company provides for the year 2014= $ 600,000*2%= $ 12,000 This will be the expense that the company expects to pay out, this will be the warranty liability. Adjusting entry will be 1/1/14 Warranty expense Warranty liability $ 12,000 $ 12,000 During the year, the warranty costs incurred was $ 5,600 Income statement for the year ended 31/12/2014 Warranty expense $ 5,600 Balance sheet During the year, the warranty liability that was provided for was $ 12,000. This is the liability that is recorded in the balance sheet. During the year $ 5,600 was expensed, this decreased the warrant liability, in the balance sheet statement. The remaining $ 6,400 will be used to cover warranty costs The warranty liability will therefore be $12,000-$5,600= $ 6,400 Balance sheet as at 31/12/2014 Warranty liability $ 6,400 Question three a. When the market interest is 7% Bond balance to be repaid is the face value of the bonds= $ 5,000,000- thus this is the principal to be paid out Coupon rate= 7% Annual payments= Amount of loan/discount factor Discount factor= {[(1+i) n]-1}/ [i (1+i) n] n= 4 years, i= 7%, Discount factor= [(1+0.07)4]-1/ [0.07(1+0.07)4] Discount factor= 3.3871 Annual payments= $ 5,000,000/3.3871= $ 1,476,189.07 Date 1/1/2014 31/12/2014 31/12/2015 31/12/2016 31/12/2017 Annual payments at 7% stated rate 1,476,189.07 1,476,189.07 1,476,189.07 1,476,189.07 b. When the market interest rate is 6% Interest payments at 7% 350,000.00 271,166.77 186,815.20 96,559.03 Principal repayments 1,126,189.07 1,205,022.31 1,289,373.87 1,379,630.04 Principal balance 5,000,000.00 3,873,810.93 2,668,788.61 1,379,414.74 -215.30 Date 1/1/2014 31/12/2014 31/12/2015 31/12/2016 31/12/2017 Annual payments at 7% stated rate 1,476,189.07 1,476,189.07 1,476,189.07 1,476,189.07 Interest payments at 6% 300,000.00 229,428.66 154,623.03 75,329.07 Principal repayments 1,176,189.07 1,246,760.41 1,321,566.04 1,400,860.00 Principal balance Interest payments at 8% 400,000 313,904.87 220,922.14 120,500.78 Principal repayments 1,076,189.07 1,162,284.20 1,255,266.93 1,355,688.29 Principal balance 5,000,000.00 3,823,810.93 2,577,050.52 1,255,484.48 - c. When the market rate is 8% Date 1/1/2014 31/12/2014 31/12/2015 31/12/2016 31/12/2017 Annual payments at 7% stated rate 1,476,189.07 1,476,189.07 1,476,189.07 1,476,189.07 5,000,000.00 3,923,810.93 2,761,526.73 1,506,259.80 150,571.51