www.LionTutors.com ACCTG 211 – Exam 2 – Practice Exam Solutions 1.
A – Refer to the equations on this material in chapter 8. The purchase of treasury stock simply reduces the number of shares outstanding. If does not have an effect on the number of shares authorized or issued. 2.
A Common stock = Par value x # of issued shares Common stock = $1 x 600,000 Common stock = $600,000 3.
D Cash received = Market value x # of shares issued Cash received = $8 x 600,000 Cash received = $4,800,000 4.
A APIC = Cash received – Common stock value APIC = $4,800,000 -­‐ $600,000 APIC = $4,200,000 5.
B Preferred dividend = Par value x # of shares x Rate Preferred dividend = $5 x 20,000 x 0.10 Preferred dividend = $10,000 Preferred dividend paid = $10,000 x 2 years = $20,000 6.
D Common stock dividend = $80,000 -­‐ $20,000 = $60,000 7.
C 8.
B -­‐ Remember that all of these accounts increase stockholder’s equity except treasury stock. Since treasury stock represents stock the firm has repurchased on the open market, it decreases stockholder’s equity. 9.
C – Preferred stockholder’s can only lose the money they invest in preferred stock no matter what happens to the company. Under normal circumstances it is very unlikely preferred stockholder’s would risk losing more money than they invested in a company. 1 10. D 11. B 12. B 13. C 14. D – The purpose of a stock split is simply to reduce the market price and par value per share and increase the number of shares outstanding to keep the stock price within a desired range. 15. A Assets = Liabilities + Shareholders' equity Contributed capital (40,000) cash (40,000) treasury stock Assets = Liabilities + Contributed capital 20,000 treasury stock 2,000 pain-­‐in capital from treasury stock transactions + Retained earnings Shareholders' equity + 16. D 22,000 cash Retained earnings 17. B Yearly preferred stock dividends = # of shares x Par value x Rate Yearly preferred stock dividends = 20,000 x $15 x .08 Yearly preferred stock dividends = $24,000 $48,000/$24,000 = 2 years 18. D -­‐ The only way to have more shares issued than outstanding is if you issued the shares then purchased them in the form of treasury stock. Thus treasury stock will be the difference between the number of issued shares and the number of outstanding shares. Treasury stock shares = Issued shares – Outstanding shares Treasury stock shares = 60,000 – 55,000 Treasury stock shares = 5,000 2 19. A Assets = Liabilities + Shareholder’s equity $25,000 = $15,000 + Shareholder’s equity Shareholder’s equity = $10,000 Shareholder’s equity = Contributed capital + Retained earnings $10,000 = Contributed capital + $3,000 Contributed capital = $7,000 20. C Yearly preferred dividend = Par value x Rate x # of shares Yearly preferred dividend = $10 x .10 x 20,000 Yearly preferred dividend = $20,000 Since our preferred stock is cumulative we will need to pay the $20,000 dividend from year 1 and the$20,000 from year 2 in year 2 for a total of $40,000 21. D Since we paid all preferred dividends in arrears in year 2 we will only need to pay $20,000 to preferred stock in year 3. This means we will pay the rest of the dividends to common stock; $80,000 ($100,000 -­‐ $20,000). 22. C Assets = Liabilities + Shareholders' equity Contributed capital (2,200) cash (2,200) treasury stock + Retained earnings 23. D Yearly preferred dividend = Par value x Rate x # of shares # of shares = Yearly preferred dividend/(Par value x Rate) # of shares = $10,000/($50 x .10) = 2,000 24. C Common Stock= # of shares issued x Par Value Common Stock = 3,000 x $.50 = $1,500 increase Additional Paid in Capital= Cash Received – Common Stock Additional Paid in Capital = (3,000 x $10) – $1,500 = $28,500 3 25. D Cash Received = Market Value x # of issued shares Cash Received = $10 x 3,000 = $30,000 26. A 27. D First we paid a 10% stock dividend which means we increased the number of share outstand by 10% to 11,000 shares outstanding (10,000 x 1.10) Then we purchased 200 shares of treasury stock which reduced the number of shares outstanding by 200 leaving us with 10,800 shares outstanding 28. D -­‐ It is important remember that the purchase of treasury stock results in a reduction of contributed capital, not retained earnings; however, both stock and cash dividends result in a reduction of retained earnings. Net income first goes to pay dividends. If there is any leftover then net income is put into retained earnings. If there is not enough net income to cover the dividends the remaining amount paid for dividends is subtracted from retained earnings. Stock dividends = 1,000 x $12 = $12,000 Cash dividends = $19,800 Net income = $30,000 Beg retained earnings: Stock dividends Cash dividends Net income Ending retained earnings: $160,000 -­‐$12,000 -­‐$19,800 $30,000 $158,200 29. C 4 30. C $1,020 Net Income + $100 Depreciation Exp (Non Cash Exp) -­‐Change in Current Assets -­‐ $1,850 Δ in A/R -­‐ $200 Δ Inventory -­‐ -­‐$50 Δ in Prepaid Insurance +Change in Current Liabilities + -­‐$800 Δ in Accounts Payable ($800) + $30 Δ Interest Payable = -­‐$1,650 NET CASH OPERATING OUTFLOW ***NOTE: The Long-­‐Term Note Payable had no effect on this problem, since operating cash flows are only affected by a change in current liabilities*** 31. B -­‐$100,000 Net Income + $30,000 Depreciation Exp (Non Cash Exp) -­‐Change in Current Assets -­‐ -­‐$60,000 Δ in A/R -­‐ $90,000 Δ Inventory +Change in Current Liabilities + $110,000 Δ in Accounts Payable ($800) = $10,000 NET CASH OPERATING INFLOW 32. D – Cash flows from investing activities are related to cash received from buying or selling long-­‐term assets. The three investing activities are 1) Purchasing the new machine, 2) Selling the machine for $70,000, note that the fact it was sold for a loss does not matter because we only care about the $70,000 cash inflow, and 3) buying a new computer. Net Cash flow from investing activities = -­‐$20,000 + $70,000 -­‐ $5,000 = $45,000 33. B – Cash flows from financing activities are related to increase or decrease of long term liabilities and shareholder’s equity accounts because they are the accounts we use to finance a company. However, note that payment of interest on a bond is considered an operating activity because interest expense is found on the income statement so it is part of operations. Net cash flow from financing activities = $100,000 + $20,000 -­‐ $1,000 = $119,000 34. D 35. A 5 36. C -­‐ The receipt of the money from the loan and issuing stock are inflows of cash. Paying the dividends is an outflow of cash Net cash flow from financing activities = $10,000 + $15,000 -­‐ $4,000 = $21,000 37. A Cash received from customers = Sales – Change in accounts receivable Cash received from customers = $100,000 -­‐ $30,000 38. C -­‐ Since our liabilities went down this year we know that we paid all of our operating expenses for the year in cash. Additionally, we paid off $30,000 in accrued liabilities so the total amount of cash we spent was $230,000. 39. B 40. B Keep in mind the ways changes in CA and CL effect cash flows: Operating section: Net income Prepaid exp Inventory Account receivable Depreciation Accounts payable Wages payable Net cash flow $20,000 -­‐$50,000 -­‐$40,000 $30,000 $15,000 $10,000 -­‐$15,000 -­‐$30,000 Notes payable is not included in the calculation of net cash flow because of the third bullet below the balance sheet. It is telling us that we are paying off a note payable with $25,000 in capital stock. This means that we owed someone $25,000. Instead of giving them cash, we gave them $25,000 in of stock in our company. Since this transaction does not involve cash, the change in notes payable does not affect net cash flow. 41. C -­‐ The only cash flow related to investing activities is the reducing of property, plant and equipment. A reduction in PPE typically comes from selling off a fixed asset such as a building. From 2000 to 2001 PPE was reduced by $150,000. This means the company had a cash inflow investing activities of $150,000. 42. B -­‐ The only cash flow we had related to financing activities was paying dividends of $4,500. Paying dividends is a cash outflow that is recorded in the financing section. Notes payable is not included in the calculation of net cash flow because of the third bullet below the balance sheet. It is telling us that we are paying off a note payable with $25,000 in capital stock. This means that we owed someone $25,000. Instead of giving them cash, we gave them $25,000 in of stock in our company. Since this transaction does not involve cash, the change in notes payable does not affect net cash flow. 6 43. C Net cash flow from operations: Net cash flow from investing: Net cash flow from financing: Change in cash from 2000 to 2001: Beginning cash balance: Ending cash balance: -­‐$30,000 $150,000 -­‐$4,500 $115,500 $1,000 $116,500 44. D -­‐ When using the indirect method we need to adjust for every change in current assets (except cash) and current liabilities to convert net income into net cash from operating activities. We also need to add back in depreciation expense because is it a non-­‐cash expense. Net income: + Decrease in AR: + Decrease in Inventory: + Increase in AP: + Depreciation exp: Change in operating cash $10,000 $4,000 $6,000 $2,000 $8,000 $30,000 45. A -­‐ We received $200 million from selling off an investment and spent $700 million to purchase equipment. Thus our net cash outflow from investing was $500 million. Revenue earned from investments is considered to be part of our normal business operations and is put under the operating section. When dividends are paid out they are recorded cash outflow in the financing section. 46. D 47. B Cash receipts from customers = Sales revenue – Change in AR Cash receipts from customers = $100,000 – (-­‐$10,000) Cash receipts from customers = $110,000 48. A Book value of the asset = $20,000 -­‐ $15,000 Book value of the asset = $5,000 Gain = Cash received from the sale – Book value $2,000 = Cash received from the sale -­‐ $5,000 Cash received from the sale = $7,000 49. C Cash paid for merchandise = COGS + Change in Inventory – Change in A/P Cash paid for merchandise = $121,000 + $1,000 -­‐ $3,000 Cash paid for merchandise = $119,000 50. B Cash received from customers = Sales – Change in accounts receivable Cash received from customers = $1,037,500 -­‐ $10,000 = $1,027,500 7 51. C Cash paid to vendors = COGS + Change in inventory – Change in accounts payable Cash paid to vendors = $780,000 + (-­‐$20,000) – (-­‐$17,000) = $777,000 52. C Cash from sale of equipment = Net book value + Gain Cash from sale of equipment = $50,000 + $10,000 = $60,000 Note that in this problem you were given net book value so you do not need to use the accumulated depreciation. If you were given gross book value you would need to use accumulated depreciation to solve for net book value. Net book value = Gross book value – Accumulated depreciation 53. C 54. B – This is because the debt to equity ratio is a solvency ratio. 55. B 56. A Return on equity = Net income/ Average shareholder’s equity 0.10 = Net income/ $1,000,000 Net income = $100,000 57. C Preferred dividend = 5,000 x 0.10 x $100 = $50,000 Average # of common shares outstanding = (80,000 + 120,000)/2 = 100,000 Earnings per share = (Net income – Preferred dividends)/ Average # of common shares outstanding Earnings per share = ($100,000 -­‐ $50,000)/ 100,000 Earnings per share = 0.50 58. C Gross margin = Sales – COGS Gross margin = $50 million -­‐ $20 million = $30 million Gross margin ratio = Gross margin/ Net sales Gross margin ratio = $30 million/ $50 million Gross margin ratio = 0.60 = 60% 8 59. A Net sales -­‐COGS -­‐Depreciation -­‐Insurance exp -­‐Salary exp -­‐Rent exp Net income $100,000 -­‐$11,000 -­‐$8,000 -­‐$4,000 -­‐$12,500 -­‐$9,000 $55,500 Profit margin = Net income/ Net sales Profit margin = $55,500/$100,000 Profit margin = 0.555 = 55.5% 60. B Total expenses = $44,500 10% reduction in expenses = $44,500 x .9 = $40,050 Net income = $100,000 -­‐ $40,050 = $59,950 Profit margin = $59,950/$100,000 = 0.5995 = 60.0% 61. D 62. A 63. D 64. B 65. C 66. B – If gross profit is 30% of sales, you know COGS will be 70% of sales. COGS = $120,000 x 0.7 = $84,000 B: P: E: Inventory $50,000 ? COGS: $84,000 $20,000 Purchases = COGS + Ending inventory – Beginning inventory Purchases = $84,000 + $20,000 -­‐ $50,000 Purchases = $54,000 9 67. A – Manufacturing costs refers to the DM, DL and MOH that go into the WIP account for the period. Cost of goods manufactured refers to the amount that is transferred out of the WIP accounting into the finished goods account. WIP B: $7,000 Manu Costs: $8,000 COGM: $9,000 E: ? Ending WIP = $7,000 + $8,000 -­‐ $9,000 Ending WIP = $6,000 68. C -­‐ If shipping costs are under the terms Freight-­‐Out that means the seller will pay for shipping costs. Therefore, this will not be included in the buyer’s COGAFS. 69. C WIP B: DM: DL: MOH: E: $20,000 $50,000 COGM: $135,000 $35,000 $70,000 $40,000 70. B B: P: E: Inventory $300,000 $1,500,000 COGS: $1,400,000 $400,000 Net income = $2,000,000 -­‐ $1,400,000 -­‐ $200,000 = $400,000 71. B Inventory B: P: F: D: E: $4,000 $40,000 $3,000 $2,000 $8,000 COGS: $41,000 10 72. B Raw Materials $10,000 $60,000 RM used: $20,000 B: P: E: $50,000 WIP B: $40,000 DM: $50,000 COGM: $310,000 DL: $100,000 MOH: $150,000 E: $30,000 73. A Jan sales = $10,000 Feb sales = $9,600 Mar sales = $8,000 Jan COGS = $4,000 Feb COGS = $3,840 Mar COGS = $3,200 Dec End Inv = $3,000 ($4,000 x .5 + $1,000) Jan End Inv = $2,920 ($3,840 x .5 + $1,000) Feb End Inv = $2,600 ($3,200 x .5 + $1,000) Jan Beg Inv = $3,000 Feb Beg Inv = $2,920 Jan Purchases = COGS + End Inv – Beg Inv $4,000 + $2,920 -­‐ $3,000 = $3,920 Feb purchases = $3,840 + $2,600 -­‐ $2,920 = $3,520 11 74. C March cash sales = $60,000 Apr cash sales = $32,000 Jan credit sales = $60,000 Feb credit sales = $72,000 Mar credit sales = $90,000 Apr credit sales = $48,000 In Mar we will collect 30% of the credit sales made in Jan, 40% of the credit sales in Feb, and 20% of the credit sales in Mar. Mar cash for credit sales = $60,000(0.30) + $72,000(0.40) + $90,000(0.20) = $64,800 Mar total cash = $60,000 + $64,800 = $124,800 In Apr we will collect 30% of the credit sales made in Feb, 40% of the credit sales in Mar, and 20% of the credit sales in Apr. Apr cash from credit sales = $72,000(0.30) + $90,000(0.40) + $48,000(0.20) = $67,200 Apr total cash = $32,000 + $67,200 = $99,200 75. A -­‐ Since James is a clothing manufacturer, it uses these materials when producing its finished goods inventory. Therefore, you should classify any materials that have not yet been used in the manufacturing process as raw materials inventory. 76. C -­‐ Advertising is not a cost incurred in the actual production of the sneakers. Labor used, depreciation of machines used, and rubber used are all costs that directly trace to the production of the sneaker; advertising is not one of these. 77. D -­‐ The first three costs are inventoriable costs, as they are incurred during the production process and are included in the inventory account and expensed to cost of goods sold. The salary of a CEO is an indirect period cost because it is not included in the cost of inventory, but rather immediately expensed to the income statement. 78. C -­‐ The lumber used in the production of tables is considered direct material, and therefore should be considered in the cost of inventory. 79. C Total Costs per unit= 500,000 fixed costs/ 100,000 units sold + $5 + $11 = $21/ per unit 80. C -­‐ Assuming we produce within our relevant range, our total fixed costs will not be affected by the amount of units we produce since they are “fixed” and do not change. 81. B -­‐ As our total production increases, our total fixed costs will stay the same. Therefore, the total fixed cost allocated per unit will decrease as more units are produced. 82. B Inventory Required – Beginning Inventory= Purchases 36,000 – 15,000 = 21,000 12 83. B Beginning Cash + Cash Collections = Cash Available on Hand -­‐ (Payments) = Cash Prior to Financing + Cash to borrow: = Minimum balance $2,000 $12,000 $14,000 ($14,500) ($500) $3,500 $3,000 84. C Cash = Sales – Change in Accounts Receivable Cash = $10,000 – $1,850 85. C Cash = COGS + Change Inventory – Change Accounts Payable Cash = $4,000 + $1,000 – (–$4,000) = $9,000 86. A – Depreciate is a non-­‐cash expense. 87. A Cash = Insurance Expense + Change in Prepaid Insurance Cash = $150 – $150 = $0 88. A Cash = Interest Expenses – Change in Interest Payable Cash = $100 – $100 = $0 89. C Cash = Net Income – Change in Retained Earnings – Change Dividends Payable Cash = $2,000 – $750 – $0 = $1,250 90. B -­‐ Cash goes down, Treasury stock goes up which causes SE to go down. Thus CA will go down and CL will stay the same so the ratio will decrease. 91. A – CA will increase and CL will stay the same so the current ratio will increase. 92. B – NCFOA is not affected and average total assets increase so the ratio will decrease. 93. B – Net income will stay the same but average SE will increase so the ratio will decrease 94. B – Net income will decrease and net sales will stay the same so the ratio will decrease. 95. C – Cash will go up by the same amount accounts receivable goes down so there will be no effect on either CA or CL so the ratio will not be effected. 96. A -­‐ Current Assets will increase by $25. Our Accounts Receivable will increase by $35 and inventory will decrease by $10. Since both accounts are current assets, the net effect is $25. Current Liabilities are unaffected by this transaction. Therefore, since the numerator increases by 25 and the denominator is unaffected, the current ratio will increase as a result of this transaction. 13 97. B -­‐ When we change from FIFO to LIFO in a period of rising prices, we will incur a higher cost of goods sold, because the most recently purchased goods will be the first ones expensed. Therefore, our net income will decrease since our expenses are increasing. Net Sales, however, are not affected at all. Since our numerator decreases and our denominator is unaffected, our profit margin will decrease. 98. B -­‐ When we pay off an accounts payable with cash, we decrease both a current liability and a current asset. Therefore, our total liabilities will decrease, but shareholder’s equity is unaffected by this problem. When the numerator decreases and the denominator is unaffected, then the ratio will decrease, as it does in this example. 14