Practice Final Test with Solutions

Practice Final Covers Chapters 13 - 15 Problem - I — Multiple Choice (20 points) Circle the one best answer. 1. Companies purchase investments in debt or stock securities for all of the following reasons except: a. earn investment income. b. strategic reasons. c. excess cash on hand. d. increase cash on hand. 2. The best way to study the relationship of the components of financial statements is to prepare a. common size statements. b. a trend analysis. c. profitabiltiy analysis. d. ratio analysis. 3. In performing a vertical analysis, the base for prepaid expenses is a. total current assets. b. total assets. c. total liabilities. d. prepaid expenses in a previous year. 4. Quine Company had credit sales of $600,000. The beginning accounts receivable balance was $80,000 and the ending accounts receivable balance was $60,000. Cash collections from customers were a. $680,000. b. $620,000. c. $600,000. d. $580,000. 5. Harbor Company reported net income of $30,000 for the year ended December 31, 2006. During the year, inventories decreased by $7,000, accounts payable decreased by $8,000, depreciation expense was $10,000 and a gain on disposal of equipment of $4,500 was recorded. Net cash provided by operations in 2006 using the indirect method was a. $59,500. b. $20,500. c. $48,500. d. $34,500. 6. On January 1, 2006, Franklinton Company sold bonds with a cost of $55,000 for $60,000. The annual interest payment on the bond had been received on December 31, 2005. The entry to record the sale of the bonds will include: a. a credit to Cash. b. a credit to Interest Receivable. c. a credit to Debt Investments. d. a debit to Loss on the Sale of Debt Investments. 1 7.Keifert Company had a balance in the Merchandise Inventory account of $260,000 at the beginning of the year and a balance of $340,000 at the end of the year. The inventory turnover ratio for 2006 was 4 times. If gross profit as a percentage of sales was 40%, the amount of sales for 2006 was a. $2,000,000. b. $1,200,000. c. $3,000,000. d. $750,000. 8. Foxter Company reported net income of $140,000 for 2006. The income statement also indicates that interest expense for 2006 was $40,000. Assuming an income tax rate of 30%, the number of times interest earned ratio for 2006 was a. 5 times. b. 6 times. c. 4.5 times. d. 3.5 times. 9. Simms Company has a 70% interest in the stock of Werton Company. What level of investment does Simms hold? a. Controlling b. Significant c. Insignificant d. Passive 10. Bechtel Enterprises has a 10% interest in Walton Company. During 2006, Walton earned net income of $45,000 and paid dividends of $20,000. The entry on the books of Bechtel to record income from the investment will include a. a debit to Stock Investments of $4,500. b. a credit to Investment Income of $2,500. c. a credit to Dividend Income of $2,000. d. a credit to Gain on the Sale of Stock Investments for $2,500. Problem- II — Comparative Analysis (20 points) Using the following selected items from the comparative balance sheet of Solver Company, illustrate horizontal and vertical analysis. Accounts Receivable Inventory Total Assets December 31, 2006 $ 870,000 950,000 4,100,000 December 31, 2005 $ 600,000 750,000 3,000,000 2 Problem - III — Statement of Cash Flows (24 points) The comparative balance sheet for Douder Company appears below: DOUDER COMPANY Comparative Balance Sheet Dec. 31, 2006 Assets Cash .......................................................................................... Accounts receivable ..................................................................... Inventory ...................................................................................... Prepaid expenses ........................................................................ Equipment .................................................................................... Accumulated depreciation—equipment ....................................... Total assets ............................................................................ Dec. 31, 2005 $53,000 6,000 11,000 2,000 20,000 (3,000) $89,000 $12,000 8,000 7,000 3,000 20,000 (2,000) $48,000 $ 1,000 13,000 38,000 37,000 $89,000 $ 4,000 14,000 18,000 12,000 $48,000 Liabilities and Stockholders' Equity Accounts payable ......................................................................... Long-term note payable ............................................................... Common stock ............................................................................. Retained earnings ........................................................................ Total liabilities and stockholders' equity ................................. The income statement for the year is as follows: DOUDER COMPANY Income Statement For the Year Ended December 31, 2006 Sales (all on credit) ...................................................................... Expenses and losses Cost of goods sold ................................................................. Operating expenses, exclusive of depreciation....................... Depreciation expense ............................................................ Interest expense ..................................................................... Loss on sale of land ............................................................... Income taxes .......................................................................... Total expenses and loss .................................................. Net income ................................................................................... $280,000 $192,000 42,300 1,000 1,200 2,500 9,000 248,000 $ 32,000 Cash dividends of $7,000 were paid during the year. Land costing $20,000 was acquired by the issuance of common stock. The property was subsequently sold for $17,500 cash. Instructions Prepare a statement of cash flows for the year ended December 31, 2006, using the indirect method. OR Prepare a statement of cash flows for the year ended December 31, 2006, using the direct method. 3 Problem - IV — Calculation of Ratios (26 points) The financial information below was taken from the annual financial statements of Harris Company. 2006 2005 Current assets $240,000 $212,000 Current liabilities 80,000 90,000 Total liabilities 182,000 160,000 Total assets 520,000 480,000 Sales 400,000 370,000 Cost of goods sold 240,000 220,000 Inventory 100,000 125,000 Receivables 100,000 60,000 Net income 50,000 48,000 Net cash provided by operating activities 30,000 25,000 Instructions Calculate the following ratios for Harris Company for 2006. 1. Current ratio. 2. Average collection period. 3. Current cash debt coverage ratio. 4. Debt to total assets ratio. 5. Cash debt coverage ratio. 6. Return on assets. 7. Profit margin ratio. 8. Asset turnover ratio. Solutions — Practice Final Problem - I — Solution 1. 2. 3. 4. 5. c d b b d 6. 7. 8. 9. 10. c a b a c Problem - II — Solution HORIZONTAL ANALYSIS Accounts Receivable Inventory Total Assets December 31, 2006 145% 127% 137% December 31, 2005 100% 100% 100% VERTICAL ANALYSIS Accounts Receivable Inventory Total Assets December 31, 2006 21% 23% 100% December 31, 2005 20% 25% 100% 4 Problem - III — Solution DOUDER COMPANY Statement of Cash Flows For the Year Ended December 31, 2006 (Indirect Method) Cash flows from operating activities Net income ....................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ............................................................................ Decrease in accounts receivable ......................................................... Increase in inventory ............................................................................. Decrease in prepaid expenses ............................................................. Decrease in accounts payable .............................................................. Loss on sale of land ............................................................................. Net cash provided by operating activities ................................. Cash flows from investing activities Proceeds from sale of land .............................................................................. Cash flows from financing activities Payment of cash dividends ............................................................................. Payment of long-term note .............................................................................. Net cash used by financing activities .................................................. Net increase in cash ................................................................................................... Cash at beginning of period ....................................................................................... Cash at end of period ................................................................................................. $32,000 $1,000 2,000 (4,000) 1,000 (3,000) 2,500 (500) 31,500 17,500 (7,000) (1,000) Noncash financing and investing activities Acquired land through issuance of common stock ...................................... (8,000) 41,000 12,000 $53,000 $20,000 DOUDER COMPANY Statement of Cash Flows For the Year Ended December 31, 2006 (Direct Method) Cash flows from operating activities Cash receipts from customers .......................................................... Cash payments To suppliers ............................................................................. For operating expenses .......................................................... For interest expense ................................................................ For income taxes ..................................................................... Net cash provided by operating activities ................... Cash flows from investing activities Proceeds from sale of land ................................................................ Cash flows from financing activities Payment of cash dividends ................................................................ Payment of long-term note ................................................................. Net cash used by financing activities ............................................... Net increase in cash ..................................................................................... Cash at beginning of period ......................................................................... Cash at end of period ................................................................................... Noncash financing and investing activities Acquired land through issuance of common stock ......................... $282,000 $199,000 (2) 41,300 (3) 1,200 9,000 (1) 250,500 31,500 17,500 (7,000) (1,000) (8,000) 41,000 12,000 $ 53,000 $20,000 5 (1) Sales Add: Decrease in accounts receivable Cash receipts from customers $280,000 2,000 $282,000 (2) Cost of goods sold Add: Increase in inventory Purchases Add: Decrease in accounts payable Cash payments to suppliers $192,000 4,000 196,000 3,000 $199,000 (3) Operating expenses, exclusive of depreciation Deduct: Decrease in prepaid expenses Cash payments for operating expenses $42,300 1,000 $41,300 Problem I V — Solution 1. Current ratio: $240,000 ÷ $80,000 = 3:1. 2. Average collection period: $400,000 =5 ($100,000 + $60,000) ÷ 2 365 ÷ 5 = 73 days. $30,000 = .35. ($90,000 + $80,000) ÷ 2 3. Current cash debt coverage ratio: 4. Debt to total assets ratio: $182,000 ÷ $520,000 = .35. 5. Cash debt coverage ratio: 6. Return on assets: 7. Profit margin ratio: $50,000 ÷ $400,000 = 12.5%. 8. Asset turnover ratio: $30,000 = .18. ($160,000 + $182,000) ÷ 2 $50,000 ($520,000 + $480,000) ÷ 2 $400,000 ($520,000 + $480,000) ÷ 2 = 10%. = .8. 6