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ACC/400
Final Exam
Name: ________________________________________
Part
I
II
III
Total
Points
20
60
20
100
Score
Part I – 20pts
Multiple Choice: (2 pt each)
1. The best definition of assets is the
a. cash owned by the company.
b. collections of resources belonging to the company and the claims on these resources.
c. Owners’ investment in the business.
d. resources belonging to a company have future benefit to the company.
2. Liabilities
a. are future economic benefits.
b. are debts and obligations.
c. possess service potential.
d. are things of value owned by a business.
3. Notes to the financial statements
a. are optional.
b. help clarify information presented in the financial statements.
c. are generally brief and few in number.
d. need not be read in detail if an unqualified opinion accompanies the financial
statements.
4. The liability created by a business when it purchases coffee beans and coffee cups on credit
from suppliers is termed a(n)
a. account payable.
b. account receivable.
c. revenue.
d. expense.
5. An income statement
a. summarizes the changes in retained earnings for a specific period of time.
b. reports the changes in assets, liabilities, and stockholders’ equity over a period of
time.
c. reports the assets, liabilities, and stockholders’ equity at a specific date.
d. presents the revenues and expenses for a specific period of time.
6. Liabilities
a. are future economic benefits.
b. are debts and obligations.
c. possess service potential.
d. are things of value owned by a business.
7. Payments to stockholders are called
a. expenses.
b. liabilities.
c. dividends.
d. distributions.
8. The discontinued operations section of the income statement refers to
a. discontinuance of a product line.
b. the income or loss on products that have been completed and sold.
c. obsolete equipment and discontinued inventory items.
d. the disposal of a significant segment of a business.
Use the following information for questions 9-10.
The following amounts were taken from the financial statements of Alien Company:
Current liabilities
Long-term liabilities
Interest Expense
Income tax expense
Net income
Net cash provided by operating activity
9. The times interest earned ratio for 2007 is
a. 3.0 times.
b. 4.8 times.
c. 4.0 times.
d. 5.2 times.
10.The cash debt coverage ratio for 2007 is
a. 50.5%.
2007
$280,000
800,000
100,000
120,000
300,000
480,000
2006
$220,000
600,000
50,000
58,000
170,000
270,000
b. 44.4%.
c. 31.6%.
d. 62.5%.
Part II – 60pts
Problems
11. Selected data taken from the 2006 financial statements of trading card company Bottoms
Company, Inc. are as follows (in millions). 10pts
Net sales
Current liabilities, February 28, 2005
Current liabilities, February 28, 2006
Net cash provided by operating activities
Total liabilities, February 28, 2005
Total liabilities, February 28, 2006
Capital expenditures
Cash dividends
Instructions
Compute these ratios at February 28, 2006:
(a) Current cash debt coverage ratio
(b) Cash debt coverage ratio
(c) Free cash flow
Provide a brief interpretation of your results.
$295.9
39.5
47.5
23.0
64.2
71.2
2.6
6.5
12. The comparative balance sheet of Stuart Company appears below: 20pt
STUART COMPANY
Comparative Balance Sheet
December 31,
_____________________________________________________________________________
Assets
2007
2006
Current assets ..........................................................................................
$ 340
$280
Plant assets ..............................................................................................
675
520
Total assets ........................................................................................
$1,015
$800
Liabilities and stockholders' equity
Current liabilities ....................................................................................
Long-term debt ........................................................................................
Common stock ........................................................................................
Retained earnings ....................................................................................
Total liabilities and stockholders' equity ..........................................
$ 180
250
325
260
$1,015
$120
160
320
200
$800
Instructions
(a) Using horizontal analysis, show the percentage change for each balance sheet item using
2006 as a base year.
(b) Using vertical analysis, prepare a common size comparative balance sheet.
13. The Brawn Company had a $400 credit balance in Allowance for Doubtful Accounts at
December 31, 2007, before the current year's provision for uncollectible accounts. An aging of
the accounts receivable revealed the following: 20pts
Estimated Percentage
Uncollectible
Current Accounts
$140,000
1%
1–30 days past due
15,000
3%
31–60 days past due
12,000
6%
61–90 days past due
5,000
12%
Over 90 days past due
7,000
30%
Total Accounts Receivable
$179,000
Instructions
a) Prepare the Estimated Uncollectible schedule for each percentage.
b) Prepare the adjusting entry on December 31, 2007, to recognize bad
debts expense.
a)
b)
14. Shown below are data from recent reports of two publicly owned bakeries. Dollar amounts are stated
in thousands. 10pts
Total Assets
Total Liabilities
Interest Expense
Operating Income
HomeStyle Bakery
$755,000
327,925
35,000
20,550
Sweet and Sassy’s
$3,127,150
2,105,000
47,508
375,090
Instructions
a. Compute for each company (1) the debt ratio and (2) the interest coverage ratio. (Round the debt ratio
to the nearest percent and the interest coverage ratio to two decimal places.)
b. In your opinion, which of these companies would a long-term creditor probably view as the safer
investment? Explain.
a)
1) Debt Ratio:
HomeStyle Bakery:
= $327,925 / $755,000 = 43.43%
Sweetand Sassy’s:
= $2,105,000 / $3,127,150 = 67.31%
2) Interest Coverage Ratio:
HomeStyle Bakery:
= $20,550 / $35,000 = 0.59
Sweetand Sassy’s:
= $375,090 / $47,508 = 7.9
b)
I would feel safer investing in HomeStyle Bakery as it has a lower debt ratio, and although
Sweetand Sassy has a higher interest coverage ratio, this is an indication that the firm can cover
its interest obligations, but not its debt obligations. A high debt ratio can be dangerous as it
exposes the company to the threat of bankruptcy if it cannot meet its obligations.
Part III – 20pts
15. Your friend, Mark, has opened a movie theater. Mark states that he does not have
time to develop and implement a system of internal controls. 10pts
a. Provide Mark with the objectives of a system of internal control.
Internal control is the whole set of procedures and controls taken by a firm to safeguard its
assets and help achieve the corporate objectives.
The major objectives, of internal control, is:
1. to safeguard property
2. ensure that the firm is achieving its stated goals.
3. ensure that staff are working coherently.
4. safeguard business information.
b. Explain to Mark why he should develop a system of internal control.
As explained above, a system of internal control helps a firm achieve its objectives. If the
system is not implemented then the theatre may not be successful.
Without the system of control all the employees would behave in a different manner that
will be opposite to the company’s objectives.
Similarly the system helps the theatre maintain all its assets and ensure that each is in a
stable and adequate condition.
16. A large stock dividend and stock split can frequently have the same effect on the market
price of a corporation’s stock. Explain how stock dividends and stock splits affect the market
price of a corporation’s stock. 10pts
A stock dividend is the payment made to the shareholders of a firm while a stock split is the
process of creating more shares by replacing current ones through a certain multiple.
Investors utilize the information, on dividends, to estimate the likely price of a share. Prior
to the stock dividend the price is usually higher than before and once the dividend is
declared the inventors may adjust their estimates based on the amount. If the amount is
substantial then the price may be higher vice versa for lower dividends.
Similarly, a stock split creates more stock. The additional stock available according to the
laws of demand and supply would affect the estimates made by the investors.
E10.13
On July 1, Pine Region Dairy leased equipment from Farm America for a period of three years.
The lease calls for monthly payments of $2,500 payable in advance on the first day of each
month, beginning July 1.
Prepare the journal entry needed to record this lease in the accounting records of Pine Region
Dairy on July 1 under each of the following independent assumptions:
a. The lease represents a simple rental arrangement.
b. At the end of three years, title to this equipment will be transferred to Pine Region Dairy at no
additional cost. The present value of the 36 monthly lease payments is $76,021, of which $2,500
is paid in cash on July 1. None of the initial $2,500 is allocated to interest expense.
c. Why is situation a, the operating lease, sometimes called off-balance-sheet financing?
d. Would it be acceptable for a company to account for a capital lease as an operating lease to
report rent expense rather than a long-term liability?
E10.16
To answer the following questions use the annual report for Tootsie Roll Industries, Inc., in
Appendix A at the end of the textbook:
a. Compute the company’s current ratio and quick ratio for the most recent year reported. Do
these ratios provide support that Tootsie Roll is able to repay its current liabilities as they come
due? Explain.
b. Compute the company’s debt ratio. Does Tootsie Roll appear to have excessive debt?
Explain.
c. Examine the company’s statement of cash flows. Does Tootsie Roll’s cash flow from
operating activities appear adequate to cover its current liabilities as they come due? Explain.