MGMT 553 EXAM 3Part I: True /False (15 Points)
1. An extraordinary item appears on the income statement
before the section on
discontinued operations.
True False
2. Earnings per share is equal to net income applicable to
common stock, divided by
the weighted number of common shares outstanding.
True False
3. The price earnings ratio is based on expected future
earnings, while the earnings
per share ratio is based on historical earnings.
True False
4. In order to receive a dividend, a stockholder must have
owned the stock as of the
declaration date.
True False
5. A stock dividend provides a stockholder with more shares
of stock, but his or her
percentage of ownership in the company is no larger than
before.
True False
6. The principal purpose of a statement of cash flows is to
measure the profitability
of a business that maintains its accounting records on the
cash basis.
True False
7. In a statement of cash flows, the term cash includes both
cash and cash
equivalents.
True False
8. Companies that show profits on the income statement will
always show positive
cash flows from operating activities.
True False
9. The purchase of equipment for the manufacturing of
inventory belongs in the
operations section of the statement of cash flows.
True False
10. In the long run, it is more important for a business to
generate positive cash
flows from investing activities than from operating
activities.
True False
11. The quick ratio is especially useful in evaluating the
liquidity of a company with
fast moving inventories.
True False
12. The gross profit rate usually is lowest on fast moving
merchandise and highest
on specialty and novelty products.
True False
13. The trend in ratios is usually more useful than looking
at a single year’s ratio.
True False
14. A company’s liquidity refers to its ability to remain
profitable.
True False
15. The lower the current ratio, the more liquid the company
appears.
True False
II. Multiple Choice (30 Points)
1. Select best answer. Stock splits:
A. Allow management to conserve cash.
B. Give stockholders more shares.
C. Cause no change in total assets, liabilities, or
stockholders’ equity.
D. Allow management to conserve cash, give stockholders more
shares, and cause
no change in total assets, liabilities, or stockholders’
equity.
2. Treasury stock appears as:
A. An asset account.
B. A liability account.
C. An expense account.
D. An equity account.
3. Extraordinary items are found on the income statement:
A. Before discontinued operations.
B. After discontinued operations.
C. Before income from continuing operations.
D. After prior period adjustments.
4. A company had 125,000 shares of common stock outstanding
on January 1 and
then sold 35,000 additional shares on March 30. IVet income
for the year was
$594,750. What are earnings per share?
A. $4.73.
B. $4.58.
C. $3.93.
D. $6.61.
5. The price-earnings ratio is the:
A. Book value of a share of common stock divided by EPS.
B. Market price of a share of common stock divided by EPS.
C. Par value of a share of common stock divided by EPS.
D. Market price divided by book value of a share of stock.
6. All of the following are advantages of an increasing cash
flow from operations
except:
A. A company is likely to pay its current bills with cash
from operations not
earnings.
B. A company with cash is in a better position to fund
growth.
C. Large cash flows eliminate the need for borrowing.
D. Earnings are viewed better if cash flows from operations
closely match net
income.
7. Cash flows from operating activities include all of the
following except:
A. Collections from customers for sales of goods.
B. Interest and dividends received.
C. Payments of interest.
D. Payments of dividends.
8. Cash flows from investing activities include all of the
following except:
A. Cash proceeds from selling investments.
B. Cash proceeds from collections on loans.
C. Cash advanced to borrowers.
D. Cash proceeds from borrowing.
9. Net income differs from net cash flows from operations
because of all the
following except:
A. Non-cash expenses such as depreciation.
B. Timing differences between recognizing revenue and
expenses and their cash
flows.
C. Gains and losses included in net income but classified as
investing or financings
activities.
D. Non-cash expenses such as depreciation, timing
differences between recognizing
revenue and expenses and their cash flows, and gains and
losses included in net
income but classified as investing or financings activities
will all will cause a
difference between net income and cash flows.
10. A statement of cash flows is not intended to assist
investors in evaluating:
A. Reasons for differences between the amount of net income
and net cash flow
from operations.
B. The company’s ability to meet its obligations and to pay
dividends.
C. Non-cash aspects of investing and financing activities.
D. The profitability of business operations.
11. A comparative financial statement:
A. Places the balance sheet, the income statement, and the
statement of cash flows
side-by-side in order to compare the results.
B. Places two or more years of a financial statement
side-by-side in order to
compare results.
C. Places the financial statements of two or more companies
side-by-side in order to
compare results.
D. Places the dollar amounts next to the percentage amounts
of a given year for the
income statement.
12. Quick assets include which of the following?
A. Cash, marketable securities, and receivables.
B. Cash, marketable securities, and inventories.
C. Cash, inventories, and receivables.
D. Market securities, receivables, and inventories.
13. The ratio that measures total liabilities as a
percentage of total assets is called:
A. Current ratio.
B. Working capital.
C. Debt ratio.
D. Quick ratio.
14. The principle factors affecting the quality of working
capital are:
A. The nature of the current assets.
B. The length of time to convert current assets into cash.
C. Both the nature of the current assets and the length of
time to convert current
assets into cash.
D.1Veither the nature of the current assets nor the length
of time to convert current
assets into cash.
~.
15. All of the following ratios are considered measures of
profitability except:
A. Earnings per share.
B. Gross profit rate.
C. Price earnings ratio.
D. Return on assets.
III. Definitions (15 Points)
1. Listed below are nine technical accounting terms:
Cash Dividend Price-Earnin s Ratio
Stock Dividend Income From Continuing
0 erations
Stock S lit Statement of 0 erations
Earnin s Per Share Prior Period Ad’ustment
Extraordinar Item
Each of the following statements describes one of these
technical terms. In the space
provided to the left of each statement, indicate the
accounting term described, or
answer “None” if the statement does not correctly
describe any of the terms.
(a) A financial statement showing the revenue, expenses, and
net earnings of a
corporation during the current accounting period.
(b) A distribution of cash to stockholders.
(c) A distribution to stockholders of additional shares of
stock, accompanied by a
proportionate reduction in the par value per share.
(d) The market price of a share of common stock, divided by
the net income of the
corporation.
(e) A correction in the amount of net income reported in an
earlier accounting
period.
(t~ An event that is material in dollar amount, unusual in
nature, and not expected to
recur in the foreseeable future.
(g) A subtotal sometimes included in an income statement to assist
investors in
forecasting the income of future accounting periods.
2. Indicate how each of the following events should be
classified in a statement of
cash flows for the current calendar year. Use the following
code:
0 =operating activities
I =investing activities
F =financing activities
X = no impact on the statement of cash flows
Assume use of the indirect method.
(a) Paid an account payable for inventory purchased in a
prior accounting
period.
(b) On December 28, made a large credit sale; terms, 2/10,
n/30.
(c) Received a dividend from an investment in IBM common
stock.
(d) Paid a dividend to stockholders.
(e) Paid the interest on a note payable to First Bank.
(~ Paid the principal amount due on the note payable to
First Bank.
(g) Transferred cash from a line of credit into the
operating cash account.
_ (h) Made an adjusting entry to record accrued wages
payable at the end of the
period.
(i) Recorded depreciation expense for the current year.
(j) Purchased plant assets for cash.
3. The balance sheet of Red Missile Company contained the
following items, among
others:
Gash __ _ _
i !~cuc~unts Receic
~1G~.Ot)Q __ .,
~1~3,(~OCl
$
pi’Z(?r~i(~ ~Y~7~I7~~~ ~~i~.~~{.~ ~~ii,nt~t)
:~G~C1lU1CS ~z1}~<'1~71~ (f~7I 121eiC~lFirii.~1S~~
`,~~?~,~O(~ ~~? j,$~{)
~GCItI~t~ el~~~I1S~S p1V~l~ij~ `~~~, (ti(} `,~7~.-FSQ
~~USt l'~t a001~S S41Ct ~I,C7~7,~nU
~~pertltin~ e~pai~.~~s t~it~cludiil~ cie~~rec:inti~,n ~~f
$9=~.?C3t~) $3~7,5(~Q
1a. Compute the amount of cash received from customers
during the current year.
A. $3,097,500.
B. $3,129,000.
C. $3,066,000.
D. $3,612,000.
1b. Compute the amount of IVew World's cash payments for
purchases of
merchandise during the current year.
A. $1,627,500.
B. $1,622,250.
C. $1,638,000.
D. $2,157,750.
1c. Compute the amount of New World's cash payments for
operating expenses.
A. $277,200.
B. $283,500.
C. $378,000.
D. $349,650.
1e. New World's net cash flow from operating activities for
the current year is:
A. $1,191,750.
B. $1,192,800.
C. $1,113,000.
D. $1,160,250.
2. Shown below are selected data from the financial
statements of Noble
Computers. (Dollar amounts are in millions, except for the
per share data.)
Income st~t~ni~nt data
Net sales ~ ~. ~~~
~'~?St of ~~~~?CIS Si?lil 1.S~U
~?laerr~tin~ e~~~e~nses ~ ~7?
Net ii~cc~irte $11 ~ '~
Bai
Noble reported earnings per share for the year of $6 and
paid cash dividends of
$2.00 per share. At year-end, the Wall Street Journal listed
1Voble’s capital stock as
trading at $81 per share. Note that per share data are
stated in actual dollars (not
millions).
2a. Noble’s price-earnings ratio at year end was:
A..07.
B. 13.5.
C. 17.
D. 1.42.
2b. Noble’s gross profit rate was:
A. 18%.
B. 46%.
C. 50%.
D. 54%.
2c. 1Voble’s operating income was:
A. $1,610.
B. $675.
C. $935.
D. $115.
2d. Noble’s return on assets was:
A. 2.6%.
B. 21%.
C. 26%.
D. 3 7%.
0
2e. Noble’s return on equity was:
A. 10%.
B. 13%.
C. 21%.
D. 1.73.
3. Given below are comparative balance sheets and an income
statement for Claret
Corporation.
t~larzt i”~~r~~c~r~tion
Balance Sheets Zt){)~j
Dec. ~ t Jan. 1
Claret (:orporation
Income Statement
For the ~~ear ended ’04~)
Cash :~ I ti.60(? $ 1 ~.Gi)tl Sales ~?2S.gl)0
~cco~uits recai~-able ~.SOI~ ;7.70f? Cost o~`~ooils salc!
(137,~~0)
Im~ente~r~~ ~~.>~J() ~C.~00 gross profit on sales $
~~1,_’CO
Egt~i~~~ent (net) ~7,?QQ 66.300 (~~eratin~ elpenses
.~,7~.3G81
;fi15?. i t7t) . I iii 0(10 t_} eratin~ income $ l ~. ;~)?
:~ec~~unts pa~~able ‘_C,000 ~S,6U0 Interest eYpens~ and
ineainataYes
(,9.100)
l~i~’idenc~s aval~le 7,StJt7 ~,~t7C~ Nat u~cc~n1~ ~ C.~93
Long-tznli note
p~5’aMle
1-F, ~ ft~ 1-F. X00
~`’apital stock. $~ par 7?.~(~U 7~’.8C)Cl
Retained earnings ~ l.’~0 36,-~0~
152 1Q(~ .’15~ OOQ
All sales were made on account. Cash dividends declared
during the year totaled
$11,492.
3a. Claret Corporation’s accounts receivable turnover for
2009 is:
A. 4.6 times.
B. 2.9 times.
C. 5.4 times.
D. 68 days.
3b. Claret Corporation’s inventory turnover for 2009 is:
A. 6.6 times.
B. 3.9 times.
C. 4.2 times.
D. 94 days.
3c. Claret Corporation’s gross profit rate for 2009 is:
A. 60.1%.
B. 39.9%.
C. 33%.
D. 68%.
3d. Claret Corporation’s return on assets for 2009 rounded
to the nearest tenth of a
percent is:
A. 9.9%.
B. 4.1%.
C. 5.9%.
D. 16.9%.
3e. Claret Corporation’s return on common stockholders’
equity for 2009, rounded
to the nearest tenth of a percent, is:
A. 5.9%.
B. 6.05%.
C. 14.4a/o.
D. 9.4%.
4. Shown below are data taken from a recent annual report of
Fa[con Co. (Dollar
amounts in millions.)
Beginning End
Of Year Of Year
Balance sheet data:
Current assets $1,034 $1,120
Total assets 1,532 1,822
Current liabilities 379 318
Total liabilities 546 477
Total stockholders’ equity 1,000 1,217
Income statement data:
Net sales $2,759
Gross profit 1,264
Operating income 574
Net income 421
Compute the Following:
Current Ratio
Working Capital at the Beginning of the year (in Millions)
Gross Profit Rate for the Year (rounded to the nearest 1%)
Return on Average Total Assets (rounded to the nearest 1%)
Return on Average Stockholders’ Equity (rounded to the
nearest 1%)
~n
Special instructions_(_Dest);_BRING BACK_TO RAMAR -WILL BE
RELEASED TO A 3RD PARTY CARRIER
Additional Notes:
REFER ATTACHMENT FOR COMPLETE QUESMGMT 553 EXAM 3Part I: True /False (15 Points)1. An extraordinary item appears on the income statement
before the section ondiscontinued operations.True False2. Earnings per share is equal to net income applicable to
common stock, divided bythe weighted number of common shares outstanding.True False3. The price earnings ratio is based on expected future
earnings, while the earningsper share ratio is based on historical earnings.True False4. In order to receive a dividend, a stockholder must have
owned the stock as of thedeclaration date.True False5. A stock dividend provides a stockholder with more shares
of stock, but his or herpercentage of ownership in the company is no larger than
before.True False6. The principal purpose of a statement of cash flows is to
measure the profitabilityof a business that maintains its accounting records on the
cash basis.True False7. In a statement of cash flows, the term cash includes both
cash and cashequivalents.True False8. Companies that show profits on the income statement will
always show positivecash flows from operating activities.True False9. The purchase of equipment for the manufacturing of
inventory belongs in theoperations section of the statement of cash flows.True False10. In the long run, it is more important for a business to
generate positive cashflows from investing activities than from operating
activities.True False11. The quick ratio is especially useful in evaluating the
liquidity of a company withfast moving inventories.True False12. The gross profit rate usually is lowest on fast moving
merchandise and higheston specialty and novelty products.True False13. The trend in ratios is usually more useful than looking
at a single year’s ratio.True False14. A company’s liquidity refers to its ability to remain
profitable.True False15. The lower the current ratio, the more liquid the company
appears.True FalseII. Multiple Choice (30 Points)1. Select best answer. Stock splits:A. Allow management to conserve cash.B. Give stockholders more shares.C. Cause no change in total assets, liabilities, or
stockholders’ equity.D. Allow management to conserve cash, give stockholders more
shares, and causeno change in total assets, liabilities, or stockholders’
equity.2. Treasury stock appears as:A. An asset account.B. A liability account.C. An expense account.D. An equity account.3. Extraordinary items are found on the income statement:A. Before discontinued operations.B. After discontinued operations.C. Before income from continuing operations.D. After prior period adjustments.4. A company had 125,000 shares of common stock outstanding
on January 1 andthen sold 35,000 additional shares on March 30. IVet income
for the year was$594,750. What are earnings per share?A. $4.73.B. $4.58.C. $3.93.D. $6.61.5. The price-earnings ratio is the:A. Book value of a share of common stock divided by EPS.B. Market price of a share of common stock divided by EPS.C. Par value of a share of common stock divided by EPS.D. Market price divided by book value of a share of stock.6. All of the following are advantages of an increasing cash
flow from operationsexcept:A. A company is likely to pay its current bills with cash
from operations notearnings.B. A company with cash is in a better position to fund
growth.C. Large cash flows eliminate the need for borrowing.D. Earnings are viewed better if cash flows from operations
closely match netincome.7. Cash flows from operating activities include all of the
following except:A. Collections from customers for sales of goods.B. Interest and dividends received.C. Payments of interest.D. Payments of dividends.8. Cash flows from investing activities include all of the
following except:A. Cash proceeds from selling investments.B. Cash proceeds from collections on loans.C. Cash advanced to borrowers.D. Cash proceeds from borrowing.9. Net income differs from net cash flows from operations
because of all thefollowing except:A. Non-cash expenses such as depreciation.B. Timing differences between recognizing revenue and
expenses and their cashflows.C. Gains and losses included in net income but classified as
investing or financingsactivities.D. Non-cash expenses such as depreciation, timing
differences between recognizingrevenue and expenses and their cash flows, and gains and
losses included in netincome but classified as investing or financings activities
will all will cause adifference between net income and cash flows.10. A statement of cash flows is not intended to assist
investors in evaluating:A. Reasons for differences between the amount of net income
and net cash flowfrom operations.B. The company’s ability to meet its obligations and to pay
dividends.C. Non-cash aspects of investing and financing activities.D. The profitability of business operations.11. A comparative financial statement:A. Places the balance sheet, the income statement, and the
statement of cash flowsside-by-side in order to compare the results.B. Places two or more years of a financial statement
side-by-side in order tocompare results.C. Places the financial statements of two or more companies
side-by-side in order tocompare results.D. Places the dollar amounts next to the percentage amounts
of a given year for theincome statement.12. Quick assets include which of the following?A. Cash, marketable securities, and receivables.B. Cash, marketable securities, and inventories.C. Cash, inventories, and receivables.D. Market securities, receivables, and inventories.13. The ratio that measures total liabilities as a
percentage of total assets is called:A. Current ratio.B. Working capital.C. Debt ratio.D. Quick ratio.14. The principle factors affecting the quality of working
capital are:A. The nature of the current assets.B. The length of time to convert current assets into cash.C. Both the nature of the current assets and the length of
time to convert currentassets into cash.D.1Veither the nature of the current assets nor the length
of time to convert currentassets into cash.~.15. All of the following ratios are considered measures of
profitability except:A. Earnings per share.B. Gross profit rate.C. Price earnings ratio.D. Return on assets.III. Definitions (15 Points)1. Listed below are nine technical accounting terms:Cash Dividend Price-Earnin s RatioStock Dividend Income From Continuing0 erationsStock S lit Statement of 0 erationsEarnin s Per Share Prior Period Ad’ustmentExtraordinar ItemEach of the following statements describes one of these
technical terms. In the spaceprovided to the left of each statement, indicate the
accounting term described, oranswer “None” if the statement does not correctly
describe any of the terms.(a) A financial statement showing the revenue, expenses, and
net earnings of acorporation during the current accounting period.(b) A distribution of cash to stockholders.(c) A distribution to stockholders of additional shares of
stock, accompanied by aproportionate reduction in the par value per share.(d) The market price of a share of common stock, divided by
the net income of thecorporation.(e) A correction in the amount of net income reported in an
earlier accountingperiod.(t~ An event that is material in dollar amount, unusual in
nature, and not expected torecur in the foreseeable future.(g) A subtotal sometimes included in an income statement to assist
investors inforecasting the income of future accounting periods.2. Indicate how each of the following events should be
classified in a statement ofcash flows for the current calendar year. Use the following
code:0 =operating activitiesI =investing activitiesF =financing activitiesX = no impact on the statement of cash flowsAssume use of the indirect method.(a) Paid an account payable for inventory purchased in a
prior accountingperiod.(b) On December 28, made a large credit sale; terms, 2/10,
n/30.(c) Received a dividend from an investment in IBM common
stock.(d) Paid a dividend to stockholders.(e) Paid the interest on a note payable to First Bank.(~ Paid the principal amount due on the note payable to
First Bank.(g) Transferred cash from a line of credit into the
operating cash account._ (h) Made an adjusting entry to record accrued wages
payable at the end of theperiod.(i) Recorded depreciation expense for the current year.(j) Purchased plant assets for cash.3. The balance sheet of Red Missile Company contained the
following items, amongothers:Gash __ _ _i !~cuc~unts Receic
paid cash dividends of$2.00 per share. At year-end, the Wall Street Journal listed
1Voble’s capital stock astrading at $81 per share. Note that per share data are
stated in actual dollars (notmillions).2a. Noble’s price-earnings ratio at year end was:A..07.B. 13.5.C. 17.D. 1.42.2b. Noble’s gross profit rate was:A. 18%.B. 46%.C. 50%.D. 54%.2c. 1Voble’s operating income was:A. $1,610.B. $675.C. $935.D. $115.2d. Noble’s return on assets was:A. 2.6%.B. 21%.C. 26%.D. 3 7%.02e. Noble’s return on equity was:A. 10%.B. 13%.C. 21%.D. 1.73.3. Given below are comparative balance sheets and an income
statement for ClaretCorporation.t~larzt i”~~r~~c~r~tionBalance Sheets Zt){)~jDec. ~ t Jan. 1Claret (:orporationIncome StatementFor the ~~ear ended ’04~)Cash :~ I ti.60(? $ 1 ~.Gi)tl Sales ~?2S.gl)0~cco~uits recai~-able ~.SOI~ ;7.70f? Cost o~`~ooils salc!
(137,~~0)Im~ente~r~~ ~~.>~J() ~C.~00 gross profit on sales $
~~1,_’COEgt~i~~~ent (net) ~7,?QQ 66.300 (~~eratin~ elpenses
.~,7~.3G81;fi15?. i t7t) . I iii 0(10 t_} eratin~ income $ l ~. ;~)?:~ec~~unts pa~~able ‘_C,000 ~S,6U0 Interest eYpens~ andineainataYes(,9.100)l~i~’idenc~s aval~le 7,StJt7 ~,~t7C~ Nat u~cc~n1~ ~ C.~93Long-tznli notep~5’aMle1-F, ~ ft~ 1-F. X00~`’apital stock. $~ par 7?.~(~U 7~’.8C)ClRetained earnings ~ l.’~0 36,-~0~152 1Q(~ .’15~ OOQAll sales were made on account. Cash dividends declared
during the year totaled$11,492.3a. Claret Corporation’s accounts receivable turnover for
2009 is:A. 4.6 times.B. 2.9 times.C. 5.4 times.D. 68 days.3b. Claret Corporation’s inventory turnover for 2009 is:A. 6.6 times.B. 3.9 times.C. 4.2 times.D. 94 days.3c. Claret Corporation’s gross profit rate for 2009 is:A. 60.1%.B. 39.9%.C. 33%.D. 68%.3d. Claret Corporation’s return on assets for 2009 rounded
to the nearest tenth of apercent is:A. 9.9%.B. 4.1%.C. 5.9%.D. 16.9%.3e. Claret Corporation’s return on common stockholders’
equity for 2009, roundedto the nearest tenth of a percent, is:A. 5.9%.B. 6.05%.C. 14.4a/o.D. 9.4%.4. Shown below are data taken from a recent annual report of
Fa[con Co. (Dollaramounts in millions.)Beginning EndOf Year Of YearBalance sheet data:Current assets $1,034 $1,120Total assets 1,532 1,822Current liabilities 379 318Total liabilities 546 477Total stockholders’ equity 1,000 1,217Income statement data:Net sales $2,759Gross profit 1,264Operating income 574Net income 421Compute the Following:Current RatioWorking Capital at the Beginning of the year (in Millions)Gross Profit Rate for the Year (rounded to the nearest 1%)Return on Average Total Assets (rounded to the nearest 1%)Return on Average Stockholders’ Equity (rounded to the
nearest 1%)~nSpecial instructions_(_Dest);_BRING BACK_TO RAMAR -WILL BE
RELEASED TO A 3RD PARTY CARRIERAdditional Notes:REFER ATTACHMENT FOR COMPLETE QUES
Recent Comments