2251 W07 Final Exam Review

1. The effect of a stock split is to

A)reduce the amount of retained earnings and increase
total contributed capital.
B)reduce the amount of retained earnings and reduce the
amount of total assets.
C)reduce the amount of retained earnings and reduce total
contributed capital.
D)reduce the amount of retained earnings and increase the
balance in a liability account.
E)None of the above is correct.
Answer: E

2. A common measure of liquidity is

a. return on assets.
b. receivable turnover.
c. profit margin.
d. debt to equity.
Answer: b

3. A common measure of profitability is

a. the acid test or quick ratio.
b. current cash debt coverage ratio.
c. return on common stockholders’ equity ratio.
d. debt to total assets.
Answer: c

4. Which of the following is a cash flow from operating

activities?
A)Purchase of merchandise for resale.
B)Sale of a piece of land no longer used in operations.
C)Sale of long-term investments in common stock.
D)Payment of a note payable.
E)None of the above is correct.
2251 W07 Final Exam Review
Answer: A

5. Creston Company gathered the following data to prepare

its 2007 statement of cash flows:

Net income $70,000

Depreciation expense 10,000
Accounts receivable decrease 5,000
Wages payable increase 6,000
Amortization of patent 2,000
Income tax payable decrease 4,000

Based only on the above data, the net cash inflow from
operating activities during 2007 was
A)$83,000.
B)$89,000.
C)$91,000.
D)$97,000.
E)None of the above is correct.
Answer: B

6. Newton Company reported total sales revenue of $55,000

and total expenses amounting to $45,000 (i.e., net income
$10,000) on its income statement for the year ended December
31, 2007. During 2007, accounts receivable decreased by
$4,000, merchandise inventory decreased by $6,000, accounts
payable increased by $2,000 and depreciation of $8,000 was
recorded. Therefore, based only on this information, the net
cash flow from operating activities for 2007 was:

A) $10,000. B) $18,000.
C) $19,000. D) $30,000.
E) None of the above is correct.
2251 W07 Final Exam Review

Answer: D

7. Treasury Stock is a(n)

a. contra asset account.
b. contra-equity account.
c. asset account.
d. expense account.

8. The Dec 31, 2007 balance sheet of the Pioneer

Company reports the following :

Common Stock – par value $ 0.19 per share, 1,000,000

shares authorized, 50,000 shares issued
$ 9,500
Contributed Capital in Excess of par , Common Stock
$ 120,500

The common stock was issued at

A. $ 0.19 per share
B. $ 0.0085 per share
C. $ 2.41 per share
D. $ 2.60 per share
Answer: D

9. A company declares a 2/1 stock split. Which of the

following is true?
A)No amounts are shifted among accounts.
B)Retained earnings would be decreased and contributed
capital would be increased.
C)Total stockholders' equity would decrease.
D)No assets or liabilities are affected by the split.
E)Both A and D are true.
2251 W07 Final Exam Review

Answer: E

10. A journal entry is recorded on what date?

a. date of declaration
b. date of record
c. date of payment
d. a & c only
Answer: d

11. The entry to record the issuance of 10,000 shares of $ 1 par

value common stock at $ 9 per share
includes a :
A. credit to common stock at par for $ 90,000
B. credit to contributed capital in excess of par, common
stock, for $ 80,000
C. debit to contributed capital un excess of par, common
stock, for $ 80,000
A. credit to cash for $ 90,000
Answer: B

12. Non-cash financing and investing activities

A)must be reported on the statement of cash flows as a
separate schedule
B)are transactions that do not cause a direct inflow or
outflow of cash.
C)are not disclosed anywhere because they do not cause an
increase or decrease in cash.
D)Only A and B are correct.
E)None of the above is correct.
Answer: D

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2251 W07 Final Exam Review
Chap 13 – Statement of Cash Flows
Question:
Use the following information to prepare a statement of cash flows for Hanson Inc.
for 2007 using the indirect method. Be sure to prepare a schedule for any non-cash
items for disclosure, if appropriate.
(a)Net income $10,000 (depreciation expense, 5,000; inventory
decrease, $1,000; no changes in accounts receivable or accounts
payable).
(b)Issued capital stock for $4,000 of equipment.
(c) Sold equipment at book value of $8,000.
(d)Paid cash dividend, $3,000 (declared in prior year).
(e) Paid long-term debt principal, $8,000 and short-term debt
principal, $2,000.
(f) Purchased equipment for $12,000 in exchange for a note payable
due in two years.
(g) The cash balance on January 1, 2007 was $10,000. :

Hanson Inc.
Statement of Cash Flows
For the Year Ended December 31, 2007

Cash flows from operating activities:

Net income $10,000
Add or (deduct) items not affecting
cash:
Depreciation expense 5,000
Inventory decrease 1,000
Net cash flow from operating $16,000
activities

Cash flow from investing activities:

Cash received from sale of equipment 8,000
Net cash flow from investing 8,000
activities

Cash flows from financing activities:

Cash received from stock issue
Cash paid for dividends (3,000)
Cash paid on long-term debt (8,000)
Cash paid on short-term debt (2,000)
Net cash flow from financing (13,000)
2251 W07 Final Exam Review
activities
Net increase in cash during 2007 11,000
Cash balance on January 1, 2007 10,000
Cash balance on December 31, 2007 $21,000

Schedule of Non-cash Investing and Financing Activities:

Issued capital stock to acquire equipment, $4,000
Signed a two year note payable for equipment, $12,000
________________________________________________________________________________

Chap 11 – Stockholders Equity

On January 1, 2007, the accounts of Mac Corporation showed the following:

Common stock, par $1, authorized 100,000 shares, 30,000

issued ? shares
Contributed capital in excess of par 60,000
Retained earnings 140,000

During 2007, the following transactions occurred affecting

stockholders’ equity (in the order given):

(a) Issued a 100% stock dividend when the market price was at $5
per share.
(b) Purchased treasury stock, 1,000 shares at a total cost of $8,000.
(c) Declared and paid cash dividends, $15,000.
(d) Net income for 2007, $25,000.

Require The stockholders’ equity section of the balance sheet for the
d: company must be prepared for the December 31, 2007
balance sheet. It is given below with certain amounts missing.
You are to supply the missing amounts by entering them in
the blanks.

STOCKHOLDERS’ EQUITY

(1) Common stock, par $1 authorized shares

100,000 shares issued _________________ (2) $___________
Contributed capital in excess of par (3) $___________
Total contributed capital (4) $___________
Retained earnings (5) $___________
(6) Treasury stock, shares __________ (7) $___________
Total stockholders’ equity (8) $___________
2251 W07 Final Exam Review
Answer:
(1) $30,000/$1 par i.e. 30,000 shares + 100% stock dividends = 60,000 shares
(2) 60,000 shares x $1 = $60,000
(3) $60,000 ( unaffected if large stock dividend)
(4) $60,000 + $60,000 = $120,000
(5) $140,000 - (stock dividend, 30,000 shares x $1) - (cash dividend, $15,000) +
net income, $25,000 = $120,000
(6) Treasury stock, shares, 1,000
(7) $8,000 (cost)
(8) $120,000 + $120,000 - $8,000 = $232,000

Chap 14 – Financial Statement Analysis ( question at end of chapter)

Answer: P14–9.
Req. 1

Name and Computation of the 2007 Ratio Brief Explanation of the Ratio

Tests of profitability:
(1) Return on equity: Measures return earned for
$23,000 ÷ $109,000* = 21.10%. owners based upon their
*($116,000 + $102,000) ÷ 2 = $109,000 investment (including retained
earnings) in the business.

(2) Return on assets: Measures the entity’s

($23,000 + $4,900*) ÷ $188,000†= 14.84%. performance in using total
resources (total assets) available
to it.
*Bonds: $70,000 x 10% x .70 = $4,900 Won’t be tested on final exam
(The average tax rate was: $10,000 ÷
$33,000 = 30%)
†($204,000 + $172,000) ÷ 2 = $188,000

(3) Financial leverage percentage: The advantage to be gained by

21.10% – 14.84% = 6.26% positive investors when the interest rate
(net of tax) is less than the
return on assets.

(4) Earnings per share A measure of the return earned

$23,000 ÷ 20,000 shares = $1.15 on each share of common stock
outstanding.
2251 W07 Final Exam Review
(5) Profit margin Indicates percent of each sales
$23,000 ÷ $450,000 = 5.1% dollar that was represented by
income.

(6) Fixed asset turnover An indication of how efficiently

$450,000 ÷ [($130,000 + $120,000) ÷ 2] = 3.6 management is using fixed
assets.

Name and Computation of the 2007 Ratio Brief Explanation of the Ratio

Tests of liquidity:
(1) Cash ratio The most stringent test of liquidity; it
$6,800 ÷ $18,000 = .38 measures the amount of cash available
to pay current liabilities.

(2) Current ratio Measures the adequacy of working

$74,000 ÷ $18,000 = 4.11 to 1 capital by relating total current assets to
total current liabilities.

(3) Quick ratio A severe test of liquidity by relating

$48,800 ÷ $18,000 = 2.71 to 1 quick assets to total current liabilities.

(4) Receivable turnover A measure of the effectiveness of credit

$180,000 ÷ [$42,000 + $28,000] granting and collection of receivables.

2
= 5.14 times
Average collection period Average number of days to collect an
365 ÷ 5.14 = 71.01 days account receivable.

(5) Inventory turnover An indication of the velocity with which

merchandise flows through the business.
$250,000 ÷ [$25,000 + $20,000]
2
= 11.11 times
2251 W07 Final Exam Review
Average days’ supply
365 ÷ 11.11 days = 32.85 days
Name and Computation of the 2007 Ratio
Tests of solvency and equity position:
(1) Times interest earned
($23,000 + $10,000 + $7,000) ÷ $7,000
= 5.7
(2) Debt/equity ratio
$88,000 ÷ $116,000 = .76
Market tests:
(1) Price/earnings ratio
$18 ÷ $1.15 = 15.65 to 1
(2) Dividend yield ratio
$0.45 ÷ $18 = 2.5%
Indicates, as a days of supply figure, the
velocity with which merchandise flows
through the business.
Brief Explanation of the Ratio
A measure of the amount of
earnings available to cover
interest expense.
Measures relationship between
resources provided by owners
versus resources provided by
creditors.
A measure of the earnings of a
company that may benefit the
investor directly or indirectly. It is
the ratio of current market price
of the stock to the EPS.
Measures cash return to the
stockholder from dividends in
relationship to the current market
price of the stock.