2024 – ACCT 504 Week 8 Final Exam 1 Set 1 Ch1 1 In the past the study of finance

ACCT 504 Week 8, Final Exam 1 Set 1

 

Ch1:
1.  In the past, the study of finance has included
A)     mergers and acquisitions.
 B) raising capital.
 C) bankruptcy.
 D) all of the above.
2.  One of the major disadvantages of a sole proprietorship is
A)    that there is unlimited liability to the owner.
 B) the simplicity of decision making.
 C) low organizational costs.
 D) low operating costs.
3.  Many companies such as Tyco, Enron, WorldCom, etc. that suffered financial distress in the late 1990s and early 2000s,
A)    committed fraud.
 B) had failed corporate governance oversight.
 C) went bankrupt.
 D) all of the above are true.
4.  Agency theory would imply that conflicts are more likely to occur between management and shareholders when
A)    the company is owned and operated by the same person.
 B) management acts in the best interests of maximizing shareholder wealth.
 C) the chairman of the board is also the chief executive officer (CEO).
 D) the board of directors exerts strong and involved oversight of management
5.  Maximization of shareholder wealth is a concept in which
A)   increased earnings is of primary importance.
 B) profits are maximized on a quarterly basis.
 C) virtually all earnings are paid as dividends to common stockholders.
 D) optimally increasing the long-term value of the firm is emphasized.
6.  Money markets would include which of the following securities?
A)    common stock and corporate bonds.
 B) treasury bills and commercial paper.
 C) certificates of deposit and preferred stock.
 D) all of the above.

7.  The Internet has affected the financial markets by
A)    creating more competition between markets.
 B) pushing the cost of trading down.
 C) forcing brokerage companies to consolidate.
 D)   all of the above

Ch. 2
1.  A short-term creditor would be most interested in
A) profitability ratios.
 B) asset utilization ratios.
 C) liquidity ratios.
 D) debt utilization ratios.
2.  Given the balance sheet and income state for Simmons Maintenance Company, compute the ratios that are also shown for the industry average.  The “right answer” refers to the question of whether a particular ratio for Simmons is better or worse than the industry average. 
 
SIMMONS MAINTENANCE COMPANY
Balance Sheet

Assets Liabilities 
Cash $  15,000 Accounts Payable $  21,000
Accts. Receivable 22,000 Notes Payable 20,000
Inventory     30,000 Accrued Expenses       5,000
  Current Assets 67,000 Current Liabilities 46,000
Net Fixed Assets     73,000 Long-term Debt 30,000
  Stockholders’ Equity     64,000

Total Assets $140,000 Total Liabilities & Stockholders’ Equity $140,000

Income Statement

Sales (80% credit)  $120,000
Less: Cost of Goods Sold      45,000
Gross Profit  75,000
Selling and Administrative Expense 20,000 
Rent Expense (Lease)   8,000     28,000
EBIT  47,000
Interest Expense        5,000
Earnings before taxes  42,000
Taxes (@ 25%)      10,500
Net Income  $  31,500
  
Common shares outstanding  15,000
EPS  $      2.10
 

Ch. 4
1.  In developing the pro forma income statement we follow four important steps:
1) compute other expenses,
2) determine a production schedule,
3) establish a sales projection,
4) determine profit by completing the actual pro forma statement. 
  What is the correct order for these four steps?
A) 1,2,3,4
 B) 4,3,2,1
 C) 2,1,3,4
 D) 3,2,1,4
2.  Ellis Sport Shop projects the following sales:
  
April May June
$75,000 $95,000 $110,000

  Ninety percent of Ellis’ sales are on credit with 60 percent of receivables collected in the month after the sale and the rest of receivables collected in the second month after the sale.  February sales were $60,000 and March sales were $70,000.  In the past Ellis’ bad debt percentage has been 0 and is expected to continue.
  
a) Prepare a monthly schedule of cash receipts for April-June.
b) What is the balance of Receivables at the end of June.

 
Ch. 5
1.  The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.

 A) fixed costs
 B) variable costs
 C) marginal costs
 D) semi-variable costs

2.  At the break-even point, a firm’s profits are
A) greater than zero.
 B) less than zero.
 C) equal to zero.
 D) Not enough information to tell

3.  A highly automated plant would generally have
A) more variable than fixed costs.
 B) more fixed than variable costs.
 C) all fixed costs.
 D) all variable costs.

4.  If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to:
 A) $13,333
 B) $10,000
 C) $30,000
 D)   $50,000

5.  Combined leverage is concerned with the relationship between
A) changes in EBIT and changes in EPS.
 B) changes in volume and changes in EPS.
 C) changes in volume and changes in EBIT.
 D) changes in EBIT and changes in net income.

6. Use the table to answer following questions:

Sales (75,000 units) $750,000
Variable costs   225,000
Contribution margin $525,000
Fixed manufacturing costs   187,500
Operating income $337,500
Interest     75,000
Earnings before taxes $262,500
Taxes (at 31%)     81,375
Net Income  $181,125
Shares outstanding 15,000
 The Degree of Operating Leverage is
The Degree of Financial Leverage is
The Degree of Combined Leverage is

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            35,000    Current liabilities         $25,000
Capital expenditures                                  $20,000     Net income                $50,000
Cash provided by operations                       $77,000     Net sales                 $100,000
Preferred stock dividends paid                    $30,000     Total liabilities            $50,000
Current assets                                          $20,000     Total assets               $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)
2. (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