ACCT504 Week 8 Quiz Solutions Guide !_correct Answers !

1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form of business organization? 

       Limited liability of investor

       Transferability of ownership

       Simple to establish

       Unlimited life

2. (TCO A) The payment of cash dividends is recorded in the _____. 

       operating section of the statement of cash flows

       investing section of the statement of cash flows

       financing section of the statement of cash flows

       noncash investing and financing section of the statement of cash flows

3. (TCOs A, B) Below is a partial list of account balances for Landon Company::

Cash                       $10,000

Prepaid insurance          700

Accounts receivable     3,500

Accounts payable        2,800

Notes payable             4,200

Common stock            1,400

Dividends                       700

Revenues                  21,000

Expenses                 17,500

What did Landon Company show as total debits? 

       $32,400

       $29,400

       $34,500

       $35,200

4. (TCOs B, E) Under the accrual basis of accounting, revenues are recorded and reported _____. 

       when companies receive payments for jobs performed or products provided

       when companies have provided products or performed services

       when companies receive payments prior to providing products or performing services

       when companies receive payments after providing products or performing services

5. (TCO D) Three companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using _____. 

       FIFO will have the highest income tax expense

       average cost will have the income tax expense

       LIFO will have the highest income tax expense

       All three methods will result in the same income tax expense.

6. (TCOs A, E) Equipment with a cost of $212,000 has an estimated salvage value of $12,000 and an estimated life of 5 years or 15,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 6,000 hours?

       $80,000

       $84,800

       $42,400

       $40,000

7. (TCO D, G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 105. The journal entry to record the issuance will show a _____.

       debit to Discount on Bonds Payable of $5,000

       debit to Premium on Bonds Payable of $5,000

       credit to Discount on Bonds Payable of $5,000

       credit to Premium on Bonds Payable of $5,000

8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $120,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $2,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____.

       $2,040,000

       $2,000,000

       $1,200,000

       $1,960,000

9. (TCO F) If you are making comparisons with other companies to provide insight into a company's competitive position, you are performing what type of analysis? 

       Common-size analysis

       Intercompany analysis

       Intracompany analysis

       Industry average analysis

10. (TCO F) In a common size income statement, the 100% figure is _____.

       Total Assets

       Total Stockholders' Equity

       Net Sales

       Net Income

11. (TCO F) Horizontal analysis of comparative financial statements includes the _____. 

       development of common-size statements

       calculation of liquidity ratios

       calculation of dollar amount changes and percentage changes from the previous year to the current year

       evaluation of financial statement data that expresses each item in a financial statement as a percentage of a base amount

12. (TCO F) A common measure of solvency is the _____. 

       asset turnover

       current cash debt coverage ratio

       cash debt coverage ratio

       current ratio

13. (TCO F) Short-term creditors would be most interested in which of the following ratios?

       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 _____. 

       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 interest payments

1. (TCO A) The partial financial statement items below were taken from the financial statements of Calibar Company. This account information can be used to correctly solve each of the ratios below. The information is in alphabetical order.

Accounts payable                                  $5,000     Net sales                 $100,000

Accounts receivable                             $18,000     Other current liabilities   $4,000

Average common shares outstanding        5,000     Salaries payable            $4,000

Cash                                                     $8,000    Stockholder's equity     $33,000

Gross profit                                          $38,000    Total assets                 $66,000

Net income                                          $10,000

Instructions: Compute the following.

a) Current ratio

b) Working capital  

c) Earnings per share

d) Debt-to-total-assets ratio 

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. 

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.

3. (TCOs B, E) The following items are taken from the financial statements of LBJ Company for 2010.

Accounts payable               $26,500

Accounts receivable               6,000

Accumulated depreciation       9,600

Bonds payable                     28,000

Cash                                    44,000

Common stock                     35,000

Cost of goods sold               19,000

Depreciation expense             4,800

Dividends                               5,300

Equipment                            58,000

Interest expense                     3,500

Patents                                  9,500

Retained earnings, January 1  20,000

Salaries expense                    7,200

Sales revenue                       38,500

Supplies                                 5,500

Instructions: Prepare an income statement and a retained earnings statement for LBJ Company. 

4. (TCO D) Your friend Cynthia 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.

1.  All checks are printed using indelible ink.

2.  Cash register tapes are used.

3.  The company accountant handles deposits and reconciles the bank account.

4.  All over-the-counter receipts are registered by two clerks who share a cash drawer.

5.  The office manager is in charge of petty cash.

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 

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)  Received bank loan   

b)  Sold equipment at book value 

c)  Increase in accounts receivable 

d)  Decrease in accounts payable  

e)  Amortization of a patent