Question 1: Multiple Choice: 1. A common measure of liquidity is a. Profit margin. b. Debt to equity. c. Return on assets. d. Accounts receivable turnover. 2. A high accounts receivable turnover ratio indicates a. Many customers are not paying their receivables in a timely manner b. The company s sales have increased c. Customers are making payments quickly d. A large portion of the company s sales are on credit 3. A statement of cash flows should be issued by a profit-oriented business a. Only when two-year comparative balance sheets are not issued b. Whenever a balance sheet and a statement of income and retained earnings are issued c. As an alternative to the statement of income and retained earnings d. Only if the business classifies its assets and liabilities as current and noncurrent 4. A successful discount retail store such as Wal-Mart would probably have a. Zero profit margin b. Low volume c. A low inventory turnover d. A high inventory turnover 5. A transaction that is material in amount, unusual in nature, but not infrequent in occurrence should be presented separately as a (an) a. Extraordinary item, net of applicable income taxes b. Prior period adjustment, but not net of applicable income taxes c. Component of income from continuing operations, but not net of applicable income taxes d. Component of income from continuing operations, net of applicable income taxes 6. In the transactions approach to income determination, income is measured by subtracting the expenses resulting from specific transactions during the period from revenues of the period also resulting from transactions. Under a strict transactions approach to income measurement, which of the following would not be considered a transaction? a. Adjustment of inventory in lower of cost or market inventory valuations when market is below cost. b. Payment of salaries c. Sale of goods on account at 20 percent markup d. Exchange of inventory at a regular selling price for equipment - 1 -
7. The balance sheet discloses a. Stocks b. Flows c. Both stocks and flows d. Neither stocks nor flows 8. The cost to replace assets with similar assets in a similar condition is the definition of which of the following current value concepts? a. Replacement cost b. Selling price c. Exit value d. Discounted present value 9. The disposal of a significant component of a business is called a. An other expense b. Discontinued operation c. A change in accounting principle d. An extraordinary item 10. The firm s ability to convert an asset to cash or to pay a current liability change is the definition of a. Financial flexibility b. Working capital c. Liquidity d. Solvency 11. The formula, Operating profit/sales, is used to calculate a. Comprehensive income percentage b. Operating profit percentage c. Gross profit percentage d. Net profit percentage 12. The installment method of recognizing revenue is not acceptable for financial reporting if a. The method is applied to only a portion of the total b. Collection expenses can be reasonably predicted c. The collectability of the sales price is reasonably assured d. The installment period is less than 12 months - 2 -
13. The net realizable value of receivables is calculated as the face value of the receivables less adjustments for a. Bad debts already written off. b. Estimated uncollectible accounts c. Credit sales d. Actual uncollected amounts adjusted for purchase discounts. 14. The return on assets ratio is comprised of a. Times interest earned and debt to stockholders equity ratio. b. Profit margin and free cash flow. c. Profit margin and debt to total assets ratio. d. Profit margin and asset turnover ratio. 15. The statement, net income should reflect all items that affected the net increase or decrease in stockholders equity during the period is consistent with which of the following concepts of income? a. Current operating performance b. Money c. Economic d. All inclusive 16. The valuation basis used in conventional financial statements is a. Original cost b. A mixture of costs and values c. Replacement cost d. Market value 17. Uncertainty and risks inherent in business situations should be adequately considered in financial reporting. This statement is an example of the concept of a. Neutrality b. Representational faithfulness c. Conservatism d. Completeness 18. Under what condition is it proper to recognize revenues prior to the sale of the merchandise? a. When the concept of internal consistency (of amounts of revenue) must be complied with b. When management has a long-established policy to do so c. When the ultimate sale of the goods is at an assured sales price d. When the revenue is to be reported as an installment sale - 3 -
19. Which of the following is characteristic of a change in an accounting estimate? a. It should be reported through the restatement of the financial statements b. It makes necessary the reporting of pro forma amounts for prior periods c. It usually need not be disclosed d. It does not affect the financial statements of prior periods 20. Which of the following is not an accounting change? a. Change in a reporting entity b. Change because of an error c. Change in accounting principle d. Change in accounting estimate Question 2: Put ( ) or ( ): 1. In the economic approach, income statement is more important than balance sheet 2. All installments of long term liabilities are classified as current liabilities 3. Arguments for those favoring historical cost measurement, is that it is objective and reliable 4. Cash flow from investing activities include acquiring and disposing of debt or equity securities of other companies 5. Cash flow information should enable financial statement users to predict the amount of net income that is likely to be achieved. 6. Changes in estimate adjusted retrospectively to the beginning balance of retained earning 7. Companies report earnings per share only for ordinary shares 8. Conservative financial statements are usually unfair to present stockholders and biased in favor of prospective stockholders 9. Current Liabilities are cash or other resources commonly identified as those which are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business 10. Entry price means asset would be valued based on the selling price that would be realized if the firm chose to dispose of it. 11. Errors are treated as prior period adjustments - 4 -
12. Expenses are decreases in net assets from peripheral or incidental transactions of an entity 13. Extra-ordinary items Include events and transactions that are both frequent and usual 14. Fair value definition based on exit price 15. Financial Capital maintenance occurs when the financial amount of net assets at the end of period exceeds the financial amount of net assets at the beginning of the period excluding transactions with owners 16. Financial information cannot affect the level of risk accepted by a firm. 17. Free cash flow describes the cash remaining from operations after adjustment for investment in securities. 18. In general, companies usually recognize revenues after point of sale 19. Investment valued at expected future value while accounts receivable valued at fair value 20. Working capital computed as total assets minus current assets Question 3: Xerox Corporation had 2014 net income of $800,000. During 2014, Xerox paid a dividend of $5 per share on 65,500 shares of preferred stock. During 2014, Xerox had 120,000 shares of stock outstanding on January 1, 2014. On May 1, 2014, Xerox issued 60,000 shares. On July 1, Xerox purchased 10,000 treasury shares, which were reissued on October 1. Required: Calculate Xerox earnings per share. Question 4: Karla Company has recorded bad debt expense in the past at a rate of 2% of net sales. In 2010, Karla decides to decrease its estimate to 1.5%. If the new rate had been used in prior years, cumulative bad debt expense would have been $285,000 instead of $380,000. In 2014, bad debt expense will be $90,000 instead of $20,000. If Karla s tax rate is 30%. Required: What amount should it report as the cumulative effect of changing the estimated bad debt rate? Question 5: The management of Rusel Inc. is trying to decide whether it can increase its dividend. During the curent year, it reported net income of $875,000. It had cash provided by operating activities of $734,000, paid cash dividends of $70,000, and had capital expenditures of $280,000. Required: Compute the company s free cash flow, and discuss whether an increase in the dividend appears warranted. - 5 -
Question 6: Selected year-end financial statements of Space Odyssey Voyages Corporation follow. (Note: All sales are on credit; Selected balance sheet amounts at December 31, 20163, were total assets, $110,350; inventory, $26,700; Account receivables, $16,000 common stock, $25,000; and retained earnings, $44,400.) SPACE ODYSSEY VOYAGES CORPORATION Income Statement For Year Ended December 31, 2014 Sales $213,800 Cost of goods sold 106,025 Gross profit $107,775 Operating expenses 47,000 Interest expense 2,250 Income before taxes $58,550 Income taxes 17,565 Net income $40,985 SPACE ODYSSEY VOYAGES CORPORATION Balance Sheet December 31, 2014 Assets Liabilities & Equity Cash $11,350 Accounts payable $14,375 Short-term investment 2,650 Accrued wages payable 1,000 Accounts receivable, net 17,000 Income taxes payable 625 Merchandise inventory 25,600 Long-term Note Payable 27,500 Prepaid expenses 1,500 Common stock, $5 par value 25,000 Plant assets, net 62,500 Retained earnings 52,100 Total assets $120,600 Total liabilities and equity $120,600 Required a. Compute the following: (1) profit margin ratio, (2) total asset turnover, (3) return on total assets, and (4) return on common stockholders equity. b. Compute the following: (1) current ratio, (2) acid-test ratio, (3) days sales uncollected, (4) inventory turnover, (5) days sales in inventory, (6) debt-to-equity ratio. <<< G o o d L u c k >>> - 6 -