Devry ACCT 504 Week 8, Final Exam 3

Multiple Choice – (2 points each) select the ONE best answer

      1.            Under the definition of accounting, which of the following is not one of the activities performed on the transactions of a business entity?    

A.           Summarizing.

B.           Interpreting.

C.           Classifying.

D.           Forecasting.

      2.            Which of the following is a measure of solvency?

A.           Current ratio

B.           Price earnings ratio

C.           Earnings per share

D.           Debt to total assets ratio

      3.            Working capital is

A.           Available to meet the growth needs and non-current obligations of a company.

B.           Nearly always the same as net income.

C.           used to evaluate a company’s solvency and long-term debt paying ability.

D.           calculated by subtracting current assets from current liabilities.

      4.            Which of the following is not an example of conservatism in accounting?

A.           Expensing tires when purchased even though they last two years.

B.           Recording gains in market value of short term investments.

C.           Recording depreciation on equipment during its useful life rather than waiting to record the loss at the time it is sold.

D.           Estimating and recording the estimated expense of defending a lawsuit when it is filed.

      5.            A corporation has which of the following set of characteristics?

A.           Shared  control, tax advantages, increased management skills and resources

B.           Simple to set up and maintains control with founder

C.           Easier to transfer ownership and raise funds, no personal liability

D.           Harder to raise funds and gives owner control

    6.               Retained earnings is the amount of

A.     cash that stockholders may withdraw as dividends when needed

B.     cash left over after all liabilities for the period have been satisfied.

C.     cash invested by the owners of the business

D.     earnings reinvested in the business which the board of directors has not paid out as dividends

      7.            The statement of cash flows would disclose the payment of a dividend

A.           nowhere on the statement.

B.           in the operating activities section.

C.           in the investing activities section.

D.           in the financing activities section.

      8.            Which of the following financial statements usually prepared first?

A.           Balance sheet.

B.           Income statement.

C.           Retained Earnings statement.

D.           Statement of cash flows.

      9.            Which of the following is a cash flow from investing activities?

A.           Purchase of merchandise for resale.

B.           Sale of inventory to customers.

C.           Sale of a franchise or a copyright.

D.           Payment of a note payable.

  10.            On the Statement of Cash Flows paying a dividend to owners is an example of

A.           operating activities.

B.           investing activities.

C.           financing activities.

D.           shareholder activities.

  11.            The price earnings ratio is unique among financial ratios because

A.           The lower the ratio, the better the performance of a company

B.           It is an indication of expectations rather than historical financial statement information

C.           It is required to be shown on the face of the income statement of a public company

D.           It is an outstanding indicator of liquidity

  12.            Which of the following is a transaction which should be recorded in an accounting system?

A.           Signing a contract to purchase a parcel of land

B.           Termination of an employee without pay

C.           Pledging to give 10% of your Company’s annual income to a charity

D.           Receiving cash of $5,000 for services to be performed in the future.

  13.            If total assets increased by $25000 during a period of time and stockholders’ equity increased by $5000 during the same period, then the amount and direction (increase or decrease) of the period’s change in total liabilities is a(n):

A.           $20,000 decrease

B.           $20,000 increase

C.           $25,000 increase

D.           $30,000 increase

  14.            Which of the following components of an financial statement is an application of the full disclosure principle which clarifies information presented in the financial statements, as well as provides additional detail:

A.           Auditor’s report.

B.           Notes to financial statements

C.           Management discussion and analysis section.

D.           President’s state of the company report.

  15.            In the annual report, where would a financial statement reader find out if the company’s financial statements give a  fair depiction of its financial position and operating results?

A.           Notes to the financial statements.

B.           Management discussion and analysis section.

C.           Balance sheet.

D.           Auditor’s report.

16.   The going concern assumption underlies the

A.           Monetary unit assumption

B.           The cost principle

C.           The materiality constraint

D.           Time period assumption

17. A good accountant must have integrity, follow the rules, have basic math skills, and objectively document reality.  These characteristics are most like those of

A             A scorekeeper in a football game

B             A politician in Washington

C             A lawyer in a courtroom

D             A construction worker after the hurricane

18. On a balance sheet, assets are listed in the order of

A.        Dollar amount (largest first).

B.         Date of acquisition (earliest first).

C.         Ease of conversion to cash.

D.        Importance to the operation of the business.

19. Primary responsibility for the information in a corporation's financial statements rests with

            A.   The shareholders of the corporation.

            B.   The managers of the corporation.

            C.   The Securities and Exchange Commission.

            D.   The certified public accountant who audited the financial statements.

20. A business's balance sheet cannot be used to accurately predict what the business might be sold for because

A.      it identifies all the revenues and expenses of the business.

B.       Assets are generally listed on the balance sheet at their historical cost, not their current value.

C.       it gives the results of operations for the current period.

D.      some of the assets and liabilities on the balance sheet may actually be those of another entity.

Problem I – Financial Statements (30 points)

You are provided with the following information for Number Crunchers, Inc, effective as of its December 31, 2004 year end.

                        Accrued income taxes                                                 $   135

Accounts payable                                                              553

Accounts receivable                                                          810

Accumulated depreciation                                              1,460

Cash                                                                                  570

Common stock (900 shares)                                              900

Cost of goods sold                                                        20,820

Current portion of long-term debt                                      640

Depreciation expense                                                        435

Dividends paid during the year                                          225

Equipment                                                                      5,060

Income tax expense                                                           105

Industrial development bonds                                         6,000

Interest expense                                                                 400

Inventories                                                                      2,052

Land                                                                             15,400

Land Held for future expansion                                     9,240

Long term lease obligation                                                 800

Pension expense                                                                  81

Prepaid expenses                                                                 12

Retained earnings, beginning                                          1,400

Sales                                                                             46,000

Supplies                                                                             150

Short term investments                                                   1,800

Trademark                                                                         210

Unearned Revenue                                                            400

Wages expense                                                               1,140

Wages payable                                                                   222

Instructions:

a)            Prepare an income statement and a retained earnings statement for Number Crunchers, Inc for the year ended December 31, 2004.

b)            Prepare a classified balance sheet for Number Crunchers, Inc. as of December 31, 2004.

Problem II (20 points)

The following information is available from the 2004 annual reports of Price Company and Stockton Company. .Both companies manufacture cash registers

                                                                                                    (Amounts in millions)

                                                                                                  Price                    Stockton

            Sales                                                                           $26,510                 $34,512

            Cost of sales                                                                   6,610                     8,887

            Net income                                                                        565                     1,271

            Current assets                                                               11,712                   28,447

            Beginning total assets                                                    17,102                   33,130

            Ending total assets                                                        22,088                   36,167

            Current liabilities                                                            7,966                   14,950

            Total liabilities                                                              16,136                   31,222

            Average common shares outstanding                                 125                        240

            Year-end share price                                                            50                          65

            Preferred stock dividends paid                                            -0-                          -0-

The following are the averages for the cash register industry

          1.     Current ratio    (Industry 2.00:1)        CA/CL                       11712/7966=                   28447/14950=

          2.     Debt to total assets ratio                      Debt/Total Amt       16136/22088 = .73         31222/36167 = 86%

                  (Industry average 60%)                                                                          

          3.     Earnings per share (average $3.00)    EPS=Net income/number of shares

          4.     Price-earnings ratio (average 15)        50/4.52=11       65/530=12        565/125=4.52          1271/240=5.30

Required:

1.      Based on the above information, evaluate Price’s solvency compared to Stockton.  Defend your answer by calculating the most relevant ratio for both companies and comparing it to the industry average.  

2.      Based on the above information, comment on the Wall Street expectations for Price

compared to Stockton and the industry average.  Defend your answer by calculating

The most relevant ratio for both companies.

Short Answer – Question III   (10 points)

Under accounting principles generally accepted in the United States of America, research and development costs to come up with new inventions, technology or creative works are recorded as an expense when incurred.  Several international students visiting your campus comment that such costs are recorded as assets and depreciated over 5 to 10 years in their country.  Indicate whether you agree with the United States accounting principle and select one of the following principles, assumptions or constraints to concisely defend your answer (cost, materiality, relevance, consistency, comparability, conservatism, and going concern) .