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1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate
form of business organization? (Points : 5)
Limited liability of investor
Transferability of ownership
Simple to establish
Unlimited life
2. (TCO A) Dividends _____. (Points : 5)
represent an expense and are an operating activity
represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity
3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:
Cash
$15,000
Prepaid insurance
5,000
Accounts receivable 2,500
Accounts payable
3,000
Notes payable
6,000
Common stock
10,000
Dividends
500
Revenues
15,000
Expenses
13,000
What did LBJ Company show as total debits?
(Points : 5)
$34,000
$36,000
$70,000
$31,000
4. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP? (Points : 5)
The Accrual basis is easier to use.
The Accrual basis is also preferred by the Internal Revenue Service.
The Accrual basis complies with the revenue recognition and matching principles.
The Accrual basis requires fewer accounting resources.
5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the
highest amount of net income?(Points : 5)
LIFO
The average cost method
FIFO
Income tax expense for the period will be the same under all assumptions.
6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200
were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a
$12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the
straight-line method will be _____. (Points : 5)
$13,800
$14,440
$12,600
$13,240
7. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94.
The journal entry to record the issuance will show a _____. (Points : 5)
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000
8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $100,000 at
the beginning and end of the year, respectively. Income reported on the income statement for the year
was $1,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to
be reported on the statement of cash flows is _____. (Points : 5)
$20,000
$1,020,000
$1,000,000
$980,000
9. (TCO F) If you are making comparisons within a company to detect changes in financial relationships
and significant trends, you are performing what type of analysis? (Points : 5)
Industry averages analysis
Intercompany analysis
Common-size analysis
Intracompany analysis
10. (TCO F) The formula for performing horizontal analysis is _____. (Points : 5)
(Current Year Amount minus Base Year Amount) divided by Current Year Amount
Base Year Amount divided by Current Year Amount
Current Year Amount minus Base Year Amount
(Current Year Amount minus Base Year Amount) divided by Base Year Amount
11. (TCO F) Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time _____.(Points : 5)
that has been arranged from the highest number to the lowest number
that has been arranged from the lowest number to the highest number
to determine which numbers are in error
to determine the amount and/or percentage increase or decrease that has taken place
12. (TCO F) A common measure of liquidity is _____. (Points : 5)
debt-to-total-assets ratio
cash debt coverage
free cash flow
working capital
13. (TCO F) Short-term creditors would be most interested in which of the following ratios? (Points : 5)
Average collection period
Times interest earned
Cash debt coverage
Free cash flow
14. (TCO G) To calculate the market value of a bond, we need to _____. (Points : 5)
multiply the bond price times the interest rate
calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and
1. (TCO A) Use the following partial financial statement information below to calculate the
liquidity and profitability ratios. This information can be used to correctly solve each of the
ratios below.
Average common shares outstanding
Capital expenditures
35,000
$20,000
Current liabilities
Net income
$50,000
$100,000
Cash provided by operations
$77,000
Net sales
Preferred stock dividends paid
$30,000
Total liabilities
Current assets
$20,000
$25,000
Total assets
$50,000
$80,000
Instructions: Compute the following.
a) Current ratio
b) Working capital
c) Earnings per share
d) Debt-to-total-assets ratio
e) Free cash flow
To earn full credit, you must show the formula you are using, show your computations, and
explain the meaning of each of your ratio results. (Points : 30)
Metric
Current Ratio
Formula Used
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Figure
0.8x
Working Capital
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
-$5,000
Earnings per
share
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠
$0.57 a
share
Debt to total
assets ratio
(𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡)
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
0.625
𝐶𝑎𝑠ℎ 𝑏𝑦 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑥𝑝.
$57,000
FCF
Indication
This means that the firm will
have a hard time paying off
its current liabilities if the
need arises.
This means that the firm
cannot continue its
operations without facing
many obligations.
This means that investors are
earning $0.57 per share
owned.
This means the company’s
capital structure relies so
much on debt
This tells us that the company
has $57,000 cash to be used.
2. (TCO D) The Oxford Company has budgeted sales revenues as follows.
Oct
Nov
Dec
Credit sales
$120,000
$96,000
$72,000
Cash sales
72,000
204,000
156,000
Total sales
192,000
300,000
228,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and
the remaining 40% will be collected in the following month. Purchases of inventory are all on
credit, with 60% paid in the month of purchase and 40% in the month following purchase.
Budgeted inventory purchases are $260,000 in October, $180,000 in November, and $84,000 in
December.
Other budgeted cash receipts include (a) the sale of plant assets for $49,400 in November and (b)
the sale of new common stock for $67,400 in December. Other budgeted cash disbursements
include (a) operating expenses of $27,000 each month, (b) selling and administrative expenses of
$50,000 each month, (c) dividends of $76,000 to be paid in November, and (d) purchase of
equipment for $24,000 cash in December.
The company has a cash balance of $40,000 at the beginning of December and wishes to
maintain a minimum cash balance of $40,000 at the end of each month. An open line of credit is
available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is
done on the first day of the month in which financing is needed and that all repayments are made
on the last day of the month in which excess cash is available. Also assume that $14,000 of
financing was obtained on November 1.
Requirements: Use this information to prepare a schedule of expected cash payments for
purchases of inventory for the months of November and December only.
This question does not require creation of an entire cash budget so please only create the
schedule that is asked for in the question because otherwise you will be wasting valuable time.
(Points : 30)
Beginning Cash Balance
Cash Receipts:
Cash sales
Collection of Sales
Sale of Plant
Sale of Stocks
Cash Disbursements:
Payment of Purchases
Operating Expenses
Dec
Nov
$40,000
$32,000
$204,000
$105,600
$49,400
$0
$156,000
$81,600
$0
$67,400
($212,000) ($122,400)
($27,000) ($27,000)
S&A Expenses
Dividends
Equipment Purchase
Interest Payments
($50,000)
($76,000)
$0
$0
($50,000)
$0
($24,000)
($1,680)
Borrowing
$14,000 $0
Ending Balance
$40,000
$119,920
3. (TCOs B, E) The following items are taken from the financial statements of Lansing Company
for 2010.
Accounts payable
$16,500
Accounts receivable
25,500
Accumulated depreciation
12,600
Bonds payable
35,000
Cash
55,000
Common stock
75,000
Cost of goods sold
53,000
Depreciation expense
6,300
Dividends
5,300
Equipment
35,000
Interest expense
4,300
Patents
6,500
Retained earnings, January 1
80,000
Salaries expense
42,000
Sales revenue
115,000
Supplies
3,500
Instructions: Prepare an income statement and a retained earnings statement for Lansing
Company. (Points : 30)
Lansing Company
Income Statement
Sales Revenue
Cost of Goods Sold
Gross Margin
Salaries Expense
$115,000
($53,000)
$62,000
($42,000)
Depreciation
Expense
Interest Expense
Net Income
($6,300)
($4,300)
$9,400
Lansing Company
Statement of Retained Earnings
Beginning Retained Earnings
Add: Net Income
Less: Dividends
Paid
Ending Retained Earnings
$80,000
$9,400
($5,300)
$89,400
4. (TCO D) Your friend James has hired you to evaluate the following internal control
procedures.
a) Explain to your friend whether each of the numbered items below is an internal control
strength or weakness. You must also state which principle relates to each of the internal controls.
b) For the weaknesses, you also need to state a recommendation for improvement.
Everyone has access to the petty cash fund.
Cash register codes are assigned to each cashier.
The treasurer is the only one allowed to sign checks.
Supervisors count cash receipts daily.
The treasurer approves of the purchases and makes the payment because he is familiar with the
purchases.
(Points : 30)
Control
Everyone has access to the petty
cash fund
Cash register codes are assigned
to each cashier.
Principle
Type
Proper authorization
Weakness
Segregation of duties
Strength
The treasurer is the only one
allowed to sign checks.
Supervisors count cash receipts
daily.
The treasurer approves of the
purchases and makes the
payment because he is familiar
with the purchases.
Proper Authorization
Strength
Independent checks
Strength
Proper Authorization
Weakness
b.) For the weaknesses, it is wise to limit the access to the petty cash funds, and instead designate
a number of authorized people to have access into it. If everyone has access to the petty cash
fund, then there is a high risk of running into fraud or theft. Also, it is not an adequate reason to
let the treasurer approve the purchases just because he is familiar with them. A thorough analysis
should be taken into consideration, and the treasurer should be accompanied with another
authorized employee with regards to making approvals of this kind.
5. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be
debited with the abbreviation DR in front of the account name and which account should be
credited with the abbreviation CR in front of the account name along with the dollar amount of
the debit and credit.
a) Investors invested $150,000 in exchange for 10,000 shares of common stock.
b) Company made payment on account for $10,000
c) Company received $15,000 for services not yet performed
d) Company purchased $7,500 worth of equipment
e) Company billed $5,000 for services performed (Points : 30)
a.) Cash DR $150 ,000
Common Stock CR $150,000
b.) Accounts Payable DR $10,000
Cash CR $10,000
c.) Cash DR $15,000
Unearned Revenue CR $15,000
d.) Equipment DR $7,500
Cash CR $7,500
e.) Accounts Receivables DR $5,000
Service Revenue CR $5,000
6. (TCO C) Please indicate which section of the statement of cash flows should contain each of
the following items and whether each item would result in an inflow or outflow of cash. The
sections are Operating, Investing, and Financing.
a) Depreciation of equipment
b) Increase in accounts payable
c) Sold a building at book value
d) Payment of dividends
e) Increase in inventory (Points : 30)
Event
Section
Result
Depreciation of equipment
Increase in accounts payable
Operating
Operating
Inflow
Inflow
Sold a building at book value
Payment of dividends
Increase in inventory
Investing
Financing
Operating
Inflow
Outflow
Outflow
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