Juggernaut

232

231

Financial Statement Analysis

for

Graduate Students

At The

Ohio University

Summer, 2015

David P. Kirch, PhD, CPA

CSC 001A

Kirch@ohio.edu

740-707-1301

The Questions

Basic Accounting

1) A companys chart of accounts is:

A) used for entries that offset other accounts.B) the set of journal entries that makes up the components of owners equity.C) a detailed list of the accounts that make up the five financial statement elements.

2) Accumulated depreciation and treasury stock aremost likelyto be shown as what types of accounts?

Accumulated depreciation

Treasury stock

A)

Contra-asset

Equity

B)

Contra-asset

Contra-equity

C)

Liability

Equity

3) Allowance for bad debts and investment in affiliates aremost likelyto be shown as what types of accounts?

Allowance for bad debts

Investment in affiliates

A)

Contra-asset

Asset

B)

Contra-asset

Liabilities

C)

Liabilities

Asset

4) The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must be equal to:

A) $150.B) $450.C) $150.

5) What is the fundamental balance sheet equation?

A) Assets = Liabilities + Stockholders' Equity (A = L + E).B) Assets = Stockholders' Equity - Liabilities (A = E - L).C) Liabilities = Assets + Stockholders' Equity (L = A + E).

6) Which of the following least accurately describes a correct use of double-entry accounting?

A) A decrease in a liability account may be balanced by a decrease in another liability account.B) A transaction may be recorded in more than two accounts.C) An increase in an asset account may be balanced by an increase in an owners equity account.

7) The purchase of equipment for $25,000 cash is most likely to be recorded as:

A) an increase in one asset account and a decrease in another asset account.B) an increase in an asset account and an increase in a liability account.C) an increase in two asset accounts.

8) Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transactionmost likelyaffect Washburns assets and liabilities?

Assets

Liabilities

A)

Unchanged

Unchanged

B)

Increase

Increase

C)

Increase

Unchanged

9) A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions aremost likelyto affect which accounts?

Purchase

Sale

A)

Assets only

Assets, revenue, expenses, owners' equity

B)

Assets only

Assets and revenues only

C)

Assets and expenses

Assets, revenue, expenses, owners' equity

10) Which of the following is the least likely to be considered an accrual for accounting purposes?

A) Accumulated depreciation.B) Wages payable.C) Unearned revenue.

11) Accruals are best described as requiring an accounting entry:

A) when an expense has been incurred.B) only when a good or service has been provided.C) when the earliest event in a transaction occurs.

12) An accounting entry that updates the historical cost of an asset to current market levels is best described as:

A) a contra account.B) a valuation adjustment.C) accumulated depreciation.

13) Alpha Company reported the following financial statement information:

December 31, 2014:

Assets

$70,000

Liabilities

45,000

December 31, 2015:

Assets

82,000

Liabilities

55,000

During 2015:

Stockholder investments

3,000

Net income

?

Dividends

6,000

Calculate Alphas net income for the year ended December 31, 2015 and thechangein stockholders equity for the year ended December 31, 2015.

Net income

Change in stockholders' equity

A)

($3,000)

$2,000 increase

B)

$5,000

$2,000 decrease

C)

$5,000

$2,000 increase

14) Wichita Corporation reported the following balances as of December 31, 2015:

Cash

$?

Accounts payable

16,000

Accounts receivable

58,000

Additional paid-in capital

42,000

Common stock

19,600

Inventory

12,000

Plant and equipment

26,800

Notes payable

20,000

Retained earnings

32,000

15) Calculate Wichitas cash and total assets as of December 31, 2015 based only on these entries.

Cash

Total assets

A)

$16,000

$129,600

B)

$32,800

$113,600

C)

$32,800

$129,600

16) Beta Company reported the following financial statement information:

December 31, 2014:

Assets

$58,000

Liabilities

28,000

December 31, 2015:

Assets

?

Liabilities

38,000

During 2015:

Stockholder investments

15,500

Net income

18,000

Dividends

7,750

Calculate Betas total assets and stockholders equity as of December 31, 2015.

Total assets

Stockholders' equity

A)

$93,750

$55,750

B)

$93,750

$30,000

C)

$79,250

$55,750

17) Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the:

A) general journal.B) initial trial balance.C) general ledger.

18) Which of the following is the best description of the flow of information in an accounting system?

A) Journal entries, general ledger, trial balance, financial statements.B) General ledger, trial balance, general journal, financial statements.C) Trial balance, general ledger, general journal, financial statements.

19) A listing of all the firms journal entries by date is called the:

A) general ledger.B) adjusted trial balance.C) general journal.

20) The best description of the general ledger is that it:

A) sorts the entries in the general journal by account.B) groups accounts into the categories that are presented in the financial statements.C) is where journal entries are first recorded.

21) Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family, Charlotte Blackmon, is concerned that management may be manipulating the earnings of some of the companies that the fund invests in. Rivers explains to Blackmon, Even though we dont have access to the detailed transactions that underlie the financial statements, we can be sure that management is not manipulating earnings because I read the footnotes to the financial statements of every company we invest in. The footnotes would disclose any deviation from appropriate accounting parameters. Rivers is:

A) correct.

B) incorrect because even within appropriate accounting parameters, management can manipulate earnings through the assumptions that rely on their discretion.

C) incorrect because deviation from appropriate accounting parameters is addressed in the auditors report, so a qualified opinion in the auditors report ensures that management is not manipulating earnings.

22) Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to his new assistant, John Stevenson, why it is crucial for an investment analyst to read the footnotes to a firms financial statement and the Management Discussion and Analysis (MD&A) before making an investment decision. Which rationale is Martinenko least likely to provide to Stevenson regarding the importance of analyzing the footnotes and MD&A?

A) Accruals, adjustments and assumptions are often explained in the footnotes and MD&A.B) Evaluating the footnotes helps the analyst assess whether management is manipulating earnings.C) The footnotes disclose whether or not the company is adhering to GAAP.

23) Reading the footnotes to a companys financial statements and the Management Discussion & Analysis is least likely to help an analyst determine:

A) the detailed information that underlies the companys accounting system.

B) the various accruals, adjustments and assumptions that went into the financial statements.

C) how well the financial statements reflect the companys true performance.

24) Regarding the use of financial statements in security analysis and selection, it would be most accurate to say that:

A) analysts can verify the accuracy of financial statements by using a firms detailed accounting system information.

B) analysts can use footnotes and Managements Discussion and Analysis to better understand assumptions used in the financial statements.

C) further analysis of a firms financial statements is typically not necessary if the firm has conformed to applicable accounting principles.

25) Which of the following statements about financial statements and reporting standards is least accurate?A) Financial statements could potentially take any form if reporting standards didnt exist.

B) The objective of financial statements is to provide economic decision makers with useful information.

C) Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions.

26) Which description of the objective of financial statements is most accurate? The objective of financial statements is:

A) to provide economic decision makers with useful information about a firms financial performance and changes in financial position.B) to provide securities analysts with objective data about a firms financial prospects.C) to provide a wide range of users with information about a firms financial prospects.

27) Which of the following statements about financial reporting standards is least accurate? Reporting standards:

A) are disclosed on Form 8K by publicly traded firms in the United States.B) narrow the range within which management estimates can be seen as reasonable.C) ensure that the information is useful to a wide range of users.

28) Which of the following is least likely to be considered a stated goal of the International Accounting Standards Board (IASB)?

A) Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of interest.

B) Develop global accounting standards requiring transparency, comparability, and high quality in financial statements.

C) Account for the needs of emerging markets and small firms when implementing global accounting standards.

29) Professional organizations of accountants and auditors that establish financial reporting standards are called:

A) Regulatory authorities.B) International organizations of securities commissions.C) Standard setting bodies.

30) Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit?

Increase in raw materials cost Increase in marketing expenseA) Yes NoB) No YesC) Yes Yes

31) Do gains and losses, as well as expenses appear on the income statement?A) Only expenses appear on the income statement.B) Only gains and losses appear on the income statement.C) Both appear on the income statement.

32) During 2015, Topeka Corporation entered into the following transactions:Transaction #1 Interest on a certificate of deposit owned by Topeka was credited to Topekas investment account. Transaction #2 Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20.

Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007?

A) Only one should be recognized.B) Neither should be recognized.C) Both should be recognized.

33) In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when:

A) the contracts are of a relatively short duration (less than one year).

B) estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.

C) lack of dependable cost estimates cause forecasts to be doubtful.

34) An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes fourteen months to build one jet, and the government pays for them in installments over the fourteen-month period. Which revenue recognition method should be used?

A) Percentage-of-completion method.B) Installment sales method.C) Completed contract method.

35) If a reliable estimate of total costs of the contract does not exist, which of the following revenue recognition methods should be used? A) Cost recovery method.B) Percentage-of-completion method.C) Completed contract method.

36) If Jackson Ski Company issues common stock, and uses the proceeds to purchase fixed assets such as equipment:

A) both cash flow from operations and cash flow from financing would increase.B) cash flow from financing would decrease and cash flow from investing would increase.C) cash flow from financing would increase and cash flow from investing would decrease.

37) When a U.S. company pays dividends to its stockholders, which type of cash flow does this represent?

A) Financing.B) Operating.C) Investing.

38) Which of the following items would least likely be included in cash flow from financing?

A) Dividends paid to shareholders.B) Purchase of treasury stock.C) Gain on sale of stock of a subsidiary.

39) Which of the following is NOT a category on the statement of cash flows? Cash flow from:

A) sales.B) financing.C) operations.

40) Which of the following items would NOT be included in cash flow from investing?

A) Proceeds related to acquisitions.B) Buying or selling a building.C) Selling stock of the company.

41) Which of the following is least likely a cash flow in the calculation of cash flow from operations under U.S. GAAP?

A) Interest income.B) Dividends paid.C) Dividends received.

42) Which of the following does NOT represent a cash flow relating to operating activity?

A) Cash received from customers.B) Dividends paid to stockholders.C) Interest paid to bondholders.

43) Holden Companys fixed asset footnote included the following:During 20X7, Holden sold machinery for a gain of $100,000. The machinery had an original cost of $500,000 and its accumulated depreciation was $240,000.At the end of 20X7, Holden purchased machinery at a cost of $1,000,000. Holden paid $400,000 cash. The balance was financed by the seller at 8% interest.Depreciation expense was $2,080,000 for the year ended 20X7.

Calculate Holdens cash flow from investing activities for the year ended 20X7.

A) $360,000 inflow.B) $40,000 outflow.C) $300,000 outflow.

44) Which of the following should be classified as cash flows from investing (CFI) by Elegant, Inc., which reports under U.S. GAAP?

A) Elegant's payment to purchase equipment to be used in its business.

B) Interest received by Elegant, Inc. on a bond Elegant, Inc. purchased from an outside investor.

C) Dividends received by Elegant, Inc. from an investment in another firm.

45) Which of the following items is NOT found in the financing cash flow part of the statement of cash flows?

A) Change in long-term debt.B) Change in retained earnings.C) Dividends paid.

46) Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below:Cash from sale of truck of $7,000.Cash salaries paid of $17,000.Cash from customers of $45,000.Depreciation expense of $5,500.Interest on bank line of credit of $1,000.Cash paid to suppliers of $22,000.Other cash expenses, including rent, of $6,300.No taxes due.

Using this information, what is the cash flow from operations for the month?

A) $11,200.B) -$1,300.C) -$300.

47) An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise$5,000Cash received from customers14,000Cash paid for purchase of equipment22,000Dividends paid2,000Cash received from issuance of preferred stock 10,000Interest received on short-term investments 1,000Wages paid 4,000Repayment of loan to the bank 5,000Cash from sale of land 12,000

Under U.S. GAAP, Xaviers reported cash flow from operations will be:

A) -$5,000.B) $5,000.C) $6,000.

48) An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise

$5,000

Cash received from customers

14,000

Cash paid for purchase of equipment

22,000

Dividends paid

2,000

Cash received from issuance of preferred stock

10,000

Interest received on short-term investments

1,000

Wages paid

4,000

Repayment of loan to the bank

5,000

Cash from sale of land

12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be:

CFF

CFI

A)

$3,000

-$10,000

B)

$10,000

$12,000

C)

$3,000

$12,000

49) The actual coupon payment on a bond is reported on the statement of cash flow as:

A) a financing cash outflow.B) an investing cash outflow.C) an operating cash outflow.

50) Which of the following transactions would least likely be reported in the cash flow statement as investing cash flows?

A) Purchase of plant and equipment used in the manufacturing process with financing provided by the seller.

B) Principal payments received from loans made to others.C) Sale of held-to-maturity securities for cash.

51) What is the difference between the direct and the indirect method of calculating cash flow from operations?

A) The indirect method starts with gross income and adjusts to cash flow from operations, while the direct method starts with gross profit and flows through the income statement to calculate cash flows from operations.

B) Balance sheet items are not included in the cash flow from operations for the direct method, while they are included for the indirect method.

C) The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items.

52) Consider the following:Argument #1:The indirect method presents a firms operating cash receipts and payments and is thus more consistent with the objectives of the cash flow statement.

Argument #2:The indirect method provides more information than the direct method and is more useful to analysts in estimating future operating cash flows.

Which of these arguments support the use of the indirect method for presenting cash flow from operating activities in the cash flow statement?

A) Argument #2 only.B) Neither argument.C) Argument #1 only.

53) The difference between cash flow from operations (CFO) under the direct method and CFO under the indirect method is:

A) balanced by an opposite difference in cash flow from investing.B) disclosed as a reserve in the footnotes to the cash flow statement.C) always equal to zero.

54) Use the following information to calculate cash flows from operations using the indirect method.Net Income: $12,000Depreciation Expense: $1,000Loss on sale of machinery: $500Increase in Accounts Receivable: $2,000Decrease in Accounts Payable: $1,500Increase in Income taxes payable: $500Repayment of Bonds: $3,000

A) Increase in cash of $7,500.B) Increase in cash of $10,500.C) Increase in cash of $9,500.

55) An analyst compiled the following information for Universe, Inc. for the year ended December 31, 20X4:

Net income was $850,000.

Depreciation expense was $200,000.

Interest paid was $100,000.

Income taxes paid were $50,000.

Common stock was sold for $100,000.

Preferred stock (eight percent annual dividend) was sold at par value of $125,000.

Common stock dividends of $25,000 were paid.

Preferred stock dividends of $10,000 were paid.

Equipment with a book value of $50,000 was sold for $100,000.

Using the indirect method and assuming U.S. GAAP, what was Universe Inc.s cash flow from operations (CFO) for the year ended December 31, 20X4?

A)

$1,050,000.

B)

$1,015,000.

C)

$1,000,000.

56) When using the indirect method for computing cash flow from operating activities, a change in accounts payable will require which of the following?

A) A negative (positive) adjustment to net income when accounts payable increases (decreases).B) A positive (negative) adjustment to net income when accounts payable increases (decreases).C) A negative adjustment to net income regardless of whether accounts payable increases or decreases.

57) What is the impact on accounts receivable if sales exceed cash collections and what is the impact on accounts payable if cash paid to suppliers exceeds purchases?

A) Only accounts receivable will increase.B) Both accounts payable and accounts receivable will increase.C) Only accounts payable will increase.

58) Pacific, Inc.s financial information includes the following, with change referring to the difference from the prior year (in $ millions):

Net Income

27

Change in Accounts Receivable

+4

Change in Accounts Payable

+1

Change in Inventory

+5

Loss on sale of equipment

-8

Gain on sale of real estate

+4

Change in Retained Earnings

+21

Dividends declared and paid

+4

Pacific, Inc.s cash flow from operations (CFO) in millions was:

A)

$23.

B)

$27.

C)

$15.

59) A company has the following changes in its balance sheet accounts:

Net Sales

$500

An increase in accounts receivable

20

A decrease in accounts payable

40

An increase in inventory

30

Sale of common stock

100

Repayment of debt

10

Depreciation

2

Net Income

100

Interest expense on debt

5

The companys cash flow from financing is:

A)

$100.

B)

$90.

C)

-$10.

60) Which of the following characteristics are required for recognition of a balance sheet asset?Characteristic #1: Future economic benefits to the firm are probable.Characteristic #2: The asset is tangible and is obtained at a cost.

Characteristic #1 Characteristic #2A) Yes NoB) Yes YesC) No No

61) Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10%. Historically, Galaxy has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxys liabilities?

Bad debt expense

Warranty expense

A)

No effect

No effect

B)

Increase

Increase

C)

No effect

Increase

62) Which of the following statements about a classified balance sheet is least likely accurate? A classified balance sheet:

A) groups accounts by subcategories.B) presents the net equity of each asset by subtracting its related liability.C) distinguishes between current and noncurrent assets.

63) Do the following characteristics have to be met in order to classify a liability as current on the balance sheet? Characteristic #1 Settlement is expected within one year or operating cycle, whichever is less.Characteristic #2 Settlement will require the use of cash within one year or operating cycle, whichever is greater.

Characteristic #1

Characteristic #2

A)

Yes

No

B)

No

Yes

C)

No

No

64) Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Petersons net working capital was $350,000. The following transactions occurred during 20X7:

Performed services on credit

$150,000

Purchased office equipment for cash

10,000

Recognized salaries expense

54,000

Purchased paint supplies on on credit

25,000

Consumed paint supplies

20,000

Paid salaries

50,000

Collected accounts receivable

157,000

Recognized straight-line depreciation expense

2,000

Paid accounts payable

15,000

Calculate Petersons working capital at the end of 20X7 and the change in cash for the year 20X7.

Working capital

Change in cash

A)

$414,000

$82,000

B)

$416,000

$82,000

C)

$416,000

$80,000

65) GTO Corporation purchased all of the common stock of Charger Company for $4 million. At the time, Charger reported total assets of $3 million and total liabilities of $1 million. At the acquisition date, the fair value of Chargers assets was $3.5 million and the fair value of Chargers liabilities was $1.3 million. What amount of goodwill should GTO report as a result of the acquisition and is it necessary for GTO to amortize the goodwill?

Goodwill

Amortization required

A)

$1.8 million

No

B)

$1.8 million

Yes

C)

$2.2 million

No

Consider the following:Statement #1 Copyrights and patents are tangible assets that can be separately identified.Statement #2 Purchased copyrights and patents are amortized on a straight line basis over 30 years.With respect to the statements about copyrights and patents acquired from an independent third party:

A) only statement #2 is incorrect.B) only statement #1 is incorrect.C) both are incorrect.

66) According to the Financial Accounting Standards Board, what is the appropriate measurement basis for equipment used in the manufacturing process and inventory that is held for sale?

Equipment

Inventory

A)

Historical cost

Lower of cost or market

B)

Historical cost

Historical cost

C)

Fair value

Lower of cost or market

Current assets that arise from the accrual process most likely include:

A) cash equivalents.B) accounts receivable.C) marketable securities.

67) On January 1, 20X7, Omega Corporation paid $45,000 to renew its property insurance for 3 years. What amount of insurance expense should Omega report for the year-ended December 31, 20X7 and what is the balance of Omegas prepaid insurance account on December 31, 20X8?

Insurance expense

Prepaid insurance

A)

$15,000

$30,000

B)

$15,000

$15,000

C)

$45,000

$15,000

68) At the beginning of 20X7, Bryans Bakery Company purchased a secret cookie recipe for $25,000. In addition, Bryan developed a new cake recipe at a cost of $5,000. Bryan expects to use both recipes indefinitely; however, the useful (economic) life of similar recipes has been 10 years. Assuming straight-line amortization, what amount of recipe expense should Bryan report for the year ended 20X7 and what amount should Bryan report as assets related to these recipes on its balance sheet at the end of 20X7?

Recipe expense

Balance sheet

A)

$5,000

$25,000

B)

$7,500

$22,500

C)

$3,000

$30,000

69) At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Betas stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security?

Available-for-sale

Trading security

A)

$2,000

$22,000

B)

$2,000

$20,000

C)

$0

$22,000

70) Consider the following statements.Statement #1:Par value is a nominal dollar value assigned to shares of stock in a corporations charter.

Statement #2:The par value of common stock represents the amount the corporation received when the stock was issued.

With respect to these statements:

A) both statements are correct.B) only statement #2 is correct.C) only statement #1 is correct.

71) Ascot Corporation has 4 million shares of common stock authorized, 2.4 million shares of common stock issued, and 1.8 million shares of common stock outstanding. How many shares of treasury stock does Ascot own and is the treasury stock reported as an asset in Ascots balance sheet?

Treasury shares

Reported as an asset

A)

600,000

Yes

B)

600,000

No

C)

1.6 million

No

72) Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the time, the book value of Slayton shares exceeded their market value. The shares are expected to be reissued in the future when the market price of Slaytons stock increases. Do Slaytons repurchased shares continue to have voting rights and to pay cash dividends?

Voting rights

Cash dividends paid

A)

Yes

No

B)

No

No

C)

No

Yes

73) Coleman Corporations unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following:

Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008.

Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Colemans adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Colemans 2007 current ratio?

Compensation expense

Current ratio

A)

$98.5 million

Decrease

B)

$94.5 million

Decrease

C)

$98.5 million

No effect

74) The statement of changes in equity is least likely to provide information on the firms:

A) payment of dividends.B) repayment of bond principal.C) comprehensive income.

75) Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to eliminate insect infestation. Customers are required to prepay for the service at the beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost of performing the service, what is themost likelyeffect on the firms liabilities and equity compared to the correct treatment?

Liabilities

Equity

A)

Overstated

Overstated

B)

Overstated

Understated

C)

Understated

Overstated

76) Common size balance sheets express all balance sheet items as a percentage of:

A) sales.B) equity.C) assets.

77) The following data is from Delta's common size financial statement:

Earnings after taxes

18%

Equity

40%

Current assets

60%

Current liabilities

30%

Sales

$300

Total assets

$1,400

What is Delta's total-liabilities-to-equity ratio?

A)

1.5.

B)

1.0.

C)

2.0.

78) Given the following income statement and balance sheet for a company:

Balance Sheet

Assets

Year 2003

Year 2004

Cash

500

450

Accounts Receivable

600

660

Inventory

500

550

Total CA

1600

1660

Plant, prop. equip

1000

1250

Total Assets

2600

2910

Liabilities

Accounts Payable

500

550

Long term debt

700

1002

Total liabilities

1200

1552

Equity

Common Stock

400

538

Retained Earnings

1000

820

Total Liabilities & Equity

2600

2910

Income Statement

Sales

3000

Cost of Goods Sold

(1000)

Gross Profit

2000

SG&A

(500)

Interest Expense

(151)

EBT

1349

Taxes (30%)

(405)

Net Income

944

What is the current ratio for 2004?

A)

3.018.

B)

0.331.

C)

2.018.

79) An analyst has gathered the following information about a company:

Balance Sheet

Assets

Cash

100

Accounts Receivable

750

Marketable Securities

300

Inventory

850

Property, Plant & Equip

900

Accumulated Depreciation

(150)

Total Assets

2750

Liabilities and Equity

Accounts Payable

300

Short-Term Debt

130

Long-Term Debt

700

Common Stock

1000

Retained Earnings

620

Total Liab. and Stockholder's equity

2750

Income Statement

Sales

1500

COGS

1100

Gross Profit

400

SG&A

150

Operating Profit

250

Interest Expense

25

Taxes

75

Net Income

150

What is the quick ratio?

A)

1.53.

B)

2.67.

C)

0.62.

S 9 R 29

80) Diabelli Inc. is a manufacturing company that is operating at normal capacity levels. Which of the following inventory costs is most likely to be recognized as an expense on Diabellis financial statements when the inventory is sold?

A) Administrative overhead.B) Allocation of fixed production overhead.C) Selling cost.

81) Goldberg Inc. produces and sells electronic equipment. Which of the following inventory costs is most likely to be recognized as an expense on Goldbergs financial statements in the period incurred?

A) Conversion cost.B) Selling cost.C) Freight costs on inputs.

S9 R30

82) When comparing capitalizing versus expensing costs which of the following statements is most accurate?

A) Expensing costs creates lower cash flows from operations and lower cash flows from investing.

B) Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.

C) Capitalizing costs creates lower cash flows from operations and higher cash flows from investing.

83) Which of the following statements regarding capitalizing versus expensing costs is least accurate?

A) Capitalization results in higher profitability initially.B) Total cash flow is higher with capitalization than expensing.C) Cash flow from investing is higher with expensing than with capitalization.

84) Which of the following statements regarding the capitalization of an expense is least accurate?

A) Capitalizing an expense creates an asset.B) Capitalizing an expense lowers current period net income.C) Capitalized expenses increases equity.

85) Capitalizing interest costs related to a companys construction of assets for its own use is required by:

A) IFRS only.B) both IFRS and U.S. GAAP.C) U.S. GAAP only.

86) Capitalized interest costs are typically reported in the cash flow statement as an outflow from:

A) investing.B) operating.C) financing.

87) Dobkin Company decides to expense costs that it would have otherwise capitalized. Compared to capitalizing, expensing these costs will result in:

A) lower asset levels and lower equity levels.B) lower asset levels and higher equity levels.C) lower asset levels and lower liability levels.

88) A firm that capitalizes rather than expensing costs will have:

A) lower cash flows from investing.B) lower cash flows from operations.C) lower profitability in the earlier years.

89 )Which of the following items is least likely an example of an intangible asset with an indefinite life?

A) Goodwill.B) Acquired patents.C) Trademarks that can be renewed at minimal cost.

90) During 2007, Big 4 Companys warehouse was totally destroyed by a tornado. Tornados are very rare in the region where Big 4 is located. The book value of the warehouse at the time of the tornado was 10 million and Big 4 is self-insured. In addition, on June 30, 2007, Big 4 acquired one of its major suppliers. The fair value of the net assets acquired by Big 4 was greater than the purchase price. According to International Financial Reporting Standards, should Big 4 recognize an extraordinary item for tornado damage and should Big 4 recognize negative goodwill on its balance sheet due to the acquisition?

Extraordinary loss

Negative goodwill

A)

No

No

B)

Yes

No

C)

No

Yes

91) Lakeside Co. recently determined that one of its processing machines has become obsolete three years early and, unexpectedly, has no salvage value. Which of the following statements is most consistent with this discovery?

A) Historically, economic depreciation was overstated.B) Lakeside Co. will owe back taxes.C) Historically, economic depreciation was understated.

92) This information pertains to equipment owned by Brigade Company.

Cost of equipment: $10,000.Estimated residual value: $2,000.Estimated useful life: 5 years.Depreciation method: straight-line.The accumulated depreciation at the end of year 3 is:

A) $1,600.B) $4,800.C) $5,200.

93) JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight line depreciation, what is the depreciation expense for 2006?

A) $6,000.B) $15,000.C) $12,000.

94) Allocating an intangible assets cost to the income statement over time is known as:

A) depreciation.B) depletion.C) amortization.

95) Intangible assets with finite useful lives are:

A) amortized over their actual lives.B) not amortized, but are tested for impairment at least annually.C) amortized over their expected useful lives.

96) Under normal circumstances, intangible assets with indefinite lives are:

A) not amortized but subject to impairment.B) amortized over a reasonable period but not subject to impairment.C) amortized over a reasonable period and subject to impairment.

97) Davis Inc. is a large manufacturing company operating in several European countries. Davis has long-lived assets currently in use that are valued on the balance sheet at $600 million. This includes previously recognized impairment losses of $80 million. The original cost of the assets was $750 million. The fair value of the assets was determined by in independent appraisal to be $690 million. Which of the following entries may Davis record under IFRS?

A) $90 million gain on income statement.B) $80 million gain on income statement and a $10 million revaluation surplus.C) $90 million revaluation surplus.

98) Under U.S. GAAP, an asset is impaired when:

A) the firm can no longer fully recover the carrying amount of the asset.B) accumulated depreciation plus salvage value exceeds acquisition costs.C) the present value of future cash flows exceeds the carrying amount of the asset.

99) An impairment write-down is least likely to decrease a company's:

A)debt-to-equity ratio.B) assets.C) future depreciation expense.

100) Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000. The original cost of the machinery was $500,000 and to date has generated accumulated depreciation of $140,000. Which of the following must Spenser record on the income statement if it decides to abandon the asset?

A) Gain of $40,000.B) Loss of $100,000.C) Loss of $360,000.

101) Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was $500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the following will Felker recognize on its income statement if it sells the machinery for $400,000?

A) Gain of $40,000.B) Loss of $100,000.C) Loss of $360,000.

102) Which of the following statements is CORRECT? Income tax expense:

A) is the amount of taxes due to the government.B) is the reported net of deferred tax assets and liabilities.C) includes taxes payable and deferred income tax expense.

103) Which of the following statements about tax deferrals is NOT correct?

A) A deferred tax liability is expected to result in future cash outflow.B) Income tax paid can include payments or refunds for other years.C) Taxes payable are determined by pretax income and the tax rate.

104) The difference between income tax expense and taxes payable is a:

A) deferred income tax expense.B) deferred tax liability.C) timing difference.

105) A tax loss carryforward is best described as the:

A) net taxable loss that can be used to reduce taxable income in the future.B) net taxable loss that can be used to refund paid taxes from the previous year.C) difference of deferred tax liabilities and deferred tax assets.

106) If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax:

A) should be considered an increase in equity.B) must be reduced by a valuation allowance.C) should be considered an asset or liability.

107) Which of the following statements regarding deferred taxes is NOT correct?

A) If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced.B) Only those components of deferred tax liabilities that are likely to reverse should be considered a liability.C) If deferred taxes are not expected to reverse in the future then they should be classified as equity.

108) When analyzing a company's financial leverage, deferred tax liabilities are best classified as:

A) a liability.B) neither as a liability, nor as equity.C) a liability or equity, depending on the company's particular situation.

109) Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity?

A) Return on assets (ROA).B) Return on equity (ROE).C) Debt-to-total assets.

110) At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goods already sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firm believes that the warranty work will be required over the next two years. The tax base of the warranty liability at the end of 20X8 is:

A) zero.B) $13,000.C) $26,000.

111) In 20X8, Oliver Ltd. received $80,000 cash from a customer for goods that it could not deliver until the next year and established a liability for unearned revenue. Oliver reports under U.S. GAAP, faces a 40% tax rate, and is located in a tax jurisdiction where unearned revenue is taxed as received. On their balance sheet for 20X8, what change in deferred tax should Oliver record as a result of this transaction?

A) A deferred tax asset of $32,000.B) A deferred tax liability of $32,000.C) There is no effect on deferred tax items from this transaction.

112) Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on past experience, it recognizes an allowance for bad debt equal to 10% of its credit sales. The tax base of Alters accounts receivable at the end of 20X8 is closest to:

A) $31,500.B) $3,500.C) $35,000.

113) Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be:

A)a decrease in deferred tax liability and a decrease in tax expense.B) an increase in deferred tax liability and an increase in tax expense.C) a decrease in deferred tax liability and an increase in tax expense.

114) On its financial statements for the year ended December 31, Jackson, Inc. listed $2,000,000 in post retirement benefits expense. Jackson, Inc. contributed $200,000 of the expense to its retirement plan during the year. Tax law recognizes cash contributions to a pension account as tax deductible, but not expense accruals. Jacksons tax rate is 40%.For the year ended December 31, Jackson, Inc. should show, based on the above, an increase in its deferred tax:

A) asset account of $720,000.B) liability account of $720,000.C) liability account of $80,000.

115) Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax:

A) asset of $48,960.B) liability of $17,000.C) asset of $17,000.

116) Unit Technologies uses accrual basis for financial reporting purposes and cash accounting for tax purposes. So far this year, Unit Technologies has recorded $195,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $131,000. Assume expenses at 50 percent in both cases (i.e., $ 97,500 on accrual basis and $ 65,500 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax:

A) liability of $16,320.B) liability of $10,880.C) asset of $10,880.

117) This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax:

A) liability of $21,760.B)liability of $16,320.C)asset of $21,760.

118) Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset/liability in this case? A deferred tax:

A) asset of $48,960.B) liability of $8,500.C) asset of $8,500.

119) Laser Tech has net temporary differences between tax and book income resulting in a deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would have what impact on deferred taxes and net income, respectively:

Deferred Taxes

Net Income

A)

Increase

Decrease

B)

Increase

No effect

C)

No effect

Decrease

An analyst gathered the following data for Alice Company.

Alice Company reported a pretax income of $400,000 in its income statement for the period ended December 31, 2002.Included in its pretax income are: (1) interest received on tax-free municipal bonds $50,000 and (2) rent expense of $20,000. (Only $10,000 was paid in cash for rent during 2002).Alice follows cash basis for tax reporting.Assume a tax rate of 40%.

What is the income tax expense that Alice should report on its income statement for the year ended December 31, 2002?

A) $160,000.B) $140,000.C) $132,000.

120) All else equal, when a company issues bonds at a premium, the debt/equity ratio will show:

A) an increasing trend over the life of the bond.B) a decreasing trend over the life of the bond.C) stable trend over the life of the bond.

121) Indata Company sold a specially manufactured item for $5,000,000 on December 31, 20X6. The item was sold on an installment sale basis, with $1,000,000 paid on the date of the sale and $4,000,000 to be paid in four annual installments of $1,000,000 plus interest at the market rate of 6%. Indatas tax rate is 40% and its costs to construct the item were $2,500,000. Indata recognizes the entire amount of the sale as income on the date the sale is made for accounting purposes, but not until cash is received for tax purposes.On its balance sheet dated December 31, 20X6, Indata will, as a result of the transaction described above, increase its deferred tax:

A) asset by $800,000.B) liability by $800,000.C) liability by $200,000.

122) Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it became more likely than not that $2,000,000 of the assets value may never be realized because of the uncertainty of future income. Graphics, Inc. should:

A) not make any adjustments until it is certain that the tax benefits will not be realized.B) reduce the asset by establishing a valuation allowance of $2,000,000 against the asset.C) reverse the asset account permanently by $2,000,000.

123) For the year ended 31 December 2004, Pick Co's pretax financial statement income was $400,000 and its taxable income was $300,000. The difference is due to the following:Interest on tax-exempt municipal bonds $140,000Premium expense on key person life insurance $(40,000)Total $100,000

Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount should Pick report as current provision for tax payable?

A) $102,000.B) $90,000.C) $120,000.

124) An analyst has gathered the following tax information:

Year 1

Year 2

Pretax Income

$60,000

$60,000

Taxable Income

$50,000

$65,000

The current tax rate is 40%. Assume the tax rate is reduced to 30% and the change is enacted at the beginning of Year 2.In year 1, what are the taxes payable and what is the deferred tax liability?

Taxes Payable

Deferred Tax Liability

A)

$24,000

$3,000

B)

$20,000

$1,500

C)

$20,000

$3,000

C

Taxes Payable = Taxable Income Current Tax Rate = $50,000 40% = $20,000. The taxes payable will be based on the current tax rate of 40%.

Deferred Tax Liability = (Pretax Income Taxable Income) 30% = ($60,000 50,000) 30% = $3,000.

SFAS 109 requires adjustments to deferred tax assets and liabilities to reflect the impact of a change in tax rates or tax laws.

Total income tax expense for Year 1 is:

A)

$23,000.

B)

$17,000.

C)

$24,000.

125) If a firm overestimates its warranty expenses, which of the following results is least likely?

A) Income tax expense will be greater than taxes payable.B) A deferred tax asset will result.C) A timing difference will result between tax and financial reporting.

126) Habel Inc. owns equipment with a tax base of $400,000 and a carrying value of $600,000. Habel also has a tax loss carryforward of $200,000 that is expected to be utilized in the foreseeable future. Deferred tax items on the balance sheet are valued based on a tax rate of 30%. If the tax rate is expected to increase to 35%, the adjustments to the value of deferred tax items will most likely cause Habels total liabilities-to-equity ratio to:

A) increase.B) decrease.C) remain unchanged.

127) Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. With respect to the taxes payable for each firm when these deferred tax items reverse, a decrease in the firms tax rates will lead to:

Firm 1

Firm 2

A)

Lower taxes payable

Lower taxes payable

B)

Higher taxes payable

Lower taxes payable

C)

Lower taxes payable

Higher taxes payable

Which of the following statements about deferred taxes is least accurate? Deferred taxes:

A) arise primarily due to differences between GAAP and IRS code.B) may never reverse in the case of companies that are growing.C) can relate to either permanent or temporary differences.

128) Which of the following statements regarding differences in taxable and pretax income is CORRECT? Differences in taxable and pretax income that:

A) result in deferred taxes are called temporary differences.B) increase or reduce the effective tax rate are called temporary differences.C) are not reversed for five or more years are called permanent differences.

128) Permanent differences in taxable and pretax income:

A) are considered as changes in the effective tax rate.B) are reported on both tax returns and financial statements.C) can be deferred in some cases.

129) Which of the following statements best justifies analyst scrutiny of valuation allowances?

A) If differences in taxable and pretax incomes are never expected to reverse, a companys equity may be understated.B) Increases in valuation allowances may be a signal that management expects earnings to improve in the future.

C) Changes in valuation allowances can be used to manage reported net income.

Information flows through an accounting system in four steps:1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the general journal.2. The general ledger sorts the entries in the general journal by account.3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.4. The account balances from the adjusted trial balance are presented in the financial statements.

Accruals fall into four categories:1. Unearned revenue.2. Accrued revenue.3. Prepaid expenses.4. Accrued expenses. Wages payable are a common example of an accrued expense.Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.

R

The Accounting Process

Learning debits and credits

The Learning Modules

Day 1

What this course is and isnt

The Plan

The website

Where are you now?

From the following information for 2014 for CoJo, Inc. prepare an Income Statement and a Balance Sheet. Assume a December 31 year end.

Accounts Payable

$200,000

Accounts Receivable

80,000

Accumulated Depreciation

(56,000)

Administrative Expenses

Advertising Expense

58,000

20,000

Building

300,000

Cash

106,000

Common Stock

300,000

Cost of Goods Sold

500,000

Equipment

140,000

Interest Expense

10,000

Inventory

120,000

Depreciation Expense

32,000

Notes Payable, Long-Term

10,000

Patent

50,000

Rent Expense

36,000

Retained Earnings

143,000

Sales

900,000

Salaries Payable

60,000

Salary Expense

120,000

Tax Expense

27,000

Taxes Payable

27,000

Utilities Expense

34,000

CoJo, Inc. issued 200 shares of common stock on June 30, 2014. There were 1,000 shares of common stock outstanding at the end of 2013 (last year).

Investment Readings

juggernaut Module 1 If you always do

what you always did,

youll always get

what you always got.

But I think that theres no magic to evaluating any financial asset. A financial asset means, by definition, that you lay out money now to get money back in the future. If every financial asset were valued properly, they would all sell at a price that reflected all of the cash that would be received from them forever until Judgment Day, discounted back to the present at the same interest rate.

Warren Buffett

So what we will be doing

The Pedagogy

What your brains wants above all else is to ________________!

Your Brain

Front Brain Back Brain

Decisions What we know

ConsequencesLong-term memory

PredictingEmotions related to experiences

CreatingLanguage

Tomorrow! Yesterday!

Learning depends on experience, but it also requires reflection, developing abstractions, and active testing of our abstractions. Often we will almost skip the reflective stage, and try a shortcut to an idea or even an action. AoCtB

-Sensory input goes primarily to the back half of the brain.

It is where long-term memory is. It is about the past.

-The front integrative cortex is about the future. It is where we develop ideas and abstract hypotheses. Things are weighted here. It is where we take charge. AoCtB

How do I learn?

I grope.

A. Einstein

Cognition requires:

Works or doesnt

(Modify Knowledge)

Try it Matches

(Or Create

Structures)

What if?

(Hypothesis)

And we have such a challenge because what you know now, you _________________________. Only you can _____________________________.

AoCtB refers to The Art of Changing the Brain, James Zull, Stylus Publishing 2002

Ohhhh -about asking questions---

Neils Bohr

We start..

Accounting Equation:

Assets = Liabilities + Owners Equity

We are going to start a corporation to sell hot dogs in a cart on the corner of Court and Union. We form a corporation, Hot Dogs, Inc. and you, and everyone in the class invests $100 and we each get one share of stock for that $100. Assume there are 20 of us. We elect a Board of Directors, a COO and start to do business. First we borrow $10,000 from the bank and buy a new cart for that amount. Next we buy 1,000 dogs and 1,000 buns. Dogs cost .15 and buns are .05 each. For our first month, we sell 900 dogs for $2 each. We pay our worker $600 and our other expenses are $300. How did we do? Are we rich yet? Was it a good investment?

We are going to start a corporation to sell hot dogs in a cart on the corner of Court and Union. We form a corporation, Hot Dogs, Inc. and you, and everyone in the class invests $100 and we each get one share of stock for that $100. Assume there are 20 of us. We elect a Board of Directors, a COO and start to do business. First we borrow $10,000 from the bank and buy a new cart for that amount. Next we buy 1,000 dogs and 1,000 buns. Dogs cost .15 and buns are .05 each. For our first month, we sell 900 dogs for $2 each. We pay our worker $600 and our other expenses are $300. How did we do? Are we rich yet? Was it a good investment?

Assets

=

Liabilities

+

Owners' Equity

CASH

+

--

--

+

--

+

Earnings Per Share

The matching concept is:

Expenses must be _______________________________________________

_______________________________________________.

How would the Hot Dog Inc. financials have changed if we owed our worker $100 at the end of January for work she did the last week of the month?

Seems appropriate------

The last thing Osama bin Laden saw on this earth was an American soldier with a gun.

Professional Tip: First Rule of the negotiator F_________ and S__________

Professional Tip: Be D_________. Both in speech and in action

Push through the discomfort

No elephants in the room here!!

epiphany Module #2 When moms on a diet,

redoubt everyones on a diet.

The concept of future value:

If you have $100 today and put it in a bank, how much will you have in the future?

|------------------------------------------------------------------------------------|

In order to put this concept to practical work, I need to know

1) when in the future are you talking

2) ____________________________

3) ____________________________

a) So you have $100 today, the bank pays annual interest of 10%, how much will you have in one year?

b) Two years?

c) One year and the bank pays interest at 10% compounded semi-annually?

Interest is normally stated on an _________________ basis.

d) If you have $1,000 today, how much will you have in 2 years, 12% interest, compounded quarterly?

The formula for FV is

The n is the number of ________________________________________________________.

If I put $100 in the bank today, the bank pays interest semi-annually at 8% how much will I have in one year?

If I put $100 in the bank today, the bank pays interest quarterly at 12%, how much will I have in one year?

From the following information for Mater, Inc., prepare the financial statements for the year ending December 31, 2014.

Cash

58,000

Common Stock

50,000

Accounts Receivable

15,000

Retained Earnings

324,000

Inventory

80,000

Sales

410,000

Building

200,000

Cost of Goods Sold

200,000

Equipment

100,000

Salary Expense

50,000

Accumulated Depreciation

20,000

Rent Expense

36,000

Security Deposit

3,000

Depreciation Expense

10,000

Accounts Payable

12,000

Office Expense

10,000

Salaries Payable

4,000

Interest Revenue

1,000

Taxes Payable

6,000

Interest Expense

5,000

Note Payable, Long-Term

40,000

Income Tax Expense

30,000

Mater Inc. declared and paid a $5,000 dividend in 2014. The beginning Common Stock was $40,000 and beginning Retained Earnings was $259,000.

From the following information for 2014 for CoJo, Inc. prepare Financial Statements. Assume a December 31 year end.

Accounts Payable

$200,000

Accounts Receivable

80,000

Accumulated Depreciation

46,000

Advertising Expense

19,000

Building

300,000

Cash

106,000

Common Stock

300,000

Cost of Goods Sold

500,000

Equipment

140,000

Interest Expense

5,000

Inventory

120,000

Depreciation Expense

28,000

Notes Payable, Long-Term

10,000

Patent

50,000

Rent Expense

75,000

Retained Earnings

171,000

Sales

825,000

Salaries Payable

60,000

Salary Expense

100,000

Tax Expense

18,000

Taxes Payable

9,000

Utilities Expense

40,000

Cojo, Inc. issued 200 shares of common stock on June 30, 2014. There were 800 shares of common stock outstanding at the end of 2013. The company declared and paid a $10,000 dividend during 2014. The beginning Common Stock was $240,000 and the beginning Retained Earnings was $141,000.

So..

An Income Statement is _________________________________________________________________

Revenues are ________________________________________________________________

Expenses are _________________________________________________________________

Another name for the Income Statement is the ____ & _____ or ______________& ___________.

And the phrase ___________ _____ ___ ______ ___________ ________ comes from this.

A Balance Sheet is _____________________________________________________________________

We classify the Balance Sheet into sections or categories. Usually this segregation is done

according to L_____________________ on the Asset side

and when they ______________ b__ p________ on the liability side.

An Asset is ___________________________________________________________________________

On the Asset side we have C ____________ A_____________ and other categories such as F_____________ A____________ and O___________ A___________

A Liability is _________________________________________________________________________

And on the Liability side of the Balance Sheet we have

C___________________ L___________________

L___________________ L___________________

and maybe O___________________ L___________________

Owners Equity is _________________________________

Two types of capital C_____________________________ and

E_____________________ which is termed R___________ E___________ in a corporation

A dividend is _______________________________________________________________.

Rule of the Professional:

Second Rule of the Successful executive

Be ________________________________

(It is ok to fake it!!----------------, but

-never, never, ever be w__________ W____________!!)

Module # 2 Homework

I was taught that the way of progress is neither swift nor easy.

Madame Marie Curie

Problem 1

From the following information for McStuffin Co. for the year ended 12/31/14, prepare the Financial Statements. There were 100 shares of common stock issued on April 1, 2014 and a dividend of $5,000 was paid on November 30, 2014. Beginning Common Stock was $9,000 and beginning Retained Earnings was $57,500.

Advertising Expense $ 1,000Rent Expense 12,000

Cash 47,000Retained Earnings 63,000

Common Stock (1,000 shares) 10,000Sales 85,000

Cost of Sales 40,000Tax Expense 4,500

Inventory 25,000Utilities Expense 2,000

Note Payable, Long-term 20,000Wage Expense 10,000

Interest Expense 5,000 Land20,000

Goodwill 10,000 Wages Payable 1,000

Accounts Payable 8,000

Problem 2

From the following information for John & Debbies Production Company for the year ended 12/31/14, prepare Financial Statements. The company issued 1,000 new shares of common stock for $10,000 on May 1, 2014 and declared and paid dividends of $2,000 in 2014. Beginning Common Stock was $90,000 and the beginning Retained Earnings was $90,600.

Accounts Payable 50,000Interest Expense 8,000

Accounts Receivable 40,000Note Payable, Long-Term 80,000

Advertising Expense 5,000Rent Expense 36,000

Cash 50,000Retained Earnings 134,000

Common Stock (10,000 Shares) 100,000Sales 200,000

Cost of Sales 72,000Tax Expense 18,600

Inventory 60,000Utilities Expense 5,000

Land 200,000Wage Expense 10,000

Patent 20,000Wages Payable 6,000

ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY

WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY

Frederick Schiller

Problem 3

If I deposit $500 in the bank today and the bank pays interest of 6% compounded annually, how much will I have 3 years from today?

Problem 4

If I deposited $2,000 in the bank today at 5%, how much would I have 8 years from today?

Problems 5

If Mary deposits $200 in an account that pays interest annually at 12%, how much will she have in 2 years?

Problem 6

If Mary deposits $200 in an account at12% that pays interest semi-annually, how much will she have in 2 years?

Problem 7

Jane will save for three years. The bank pays interest at 10% compounded semi-annually. How much will she have in three years if she deposits $1,000 today?

Problem 9

For Jane (6), what if the bank paid interest annually?

Problem 10

How much will you have in three years if you put $100 in the bank today and the bank pays

A) 8% compounded annually?

B) 16% compounded quarterly?

C) 12% compounded semi-annually?

D) 24% compounded quarterly?

Read & study pages 18 and 19

_________________________________________________________________________

EPS for Bella (Problem on next page)

100,000/ 2/12 X 6,000 + 3/12 X 8,000 + 1/12 X 12,000 + 6/12 X 16,000

= 100,000/12,000

= $8.33

Calculating Weighted Average Earnings Per Share

Earnings Per Share (EPS)

Types of EPS

Basic

Diluted

We will only be using Basic during this class

EPS = Net Income

Weighted Average Number of Shares Outstanding

Weighted Average EPS

Greges Corporation had net income for 2014 of $100,000. At the beginning of the year they had 10,000 shares of common stock outstanding. On April 1 they sold 4,000 shares to the public. On October 1, they sold 3,000 more shares. At December 31st, they had total assets of $1,000,000 and total Liabilities of $600,000. Calculate the EPS.

$100,000 1

(3/12 X 10,000)+ (6/12 X 14,000) + (3/12 X 17,000)

= 7.27

For 2014, Bella Company earned $100,000. The company had 6,000 shares outstanding on January 1, sold 2,000 shares on March 1 and sold 4,000 shares on June 1 and another 4,000 on July 1. Calculate the EPS for Bella. (Answer is on previous page.)

Depreciation

When a company buys a fixed asset (accountanteze for buildings, machines, furniture, trucks and so forth) the cost of the asset, except land, must be allocated over the period the asset helps the company generate revenues. The period over which the asset is useful to the company in generating revenues is called its economic or useful life. Therefore, a definition of depreciation expense is the allocation of the cost of a fixed asset over its estimated useful life. To figure the amount of the expense for each year under the straight-line method of depreciation, we use the following formula:

Cost - Estimated Salvage Value

Depreciation Expense per year = Estimated Life of the Asset

Suppose we bought a truck to deliver our product. The truck cost us $30,000 and we estimate that we will use it for 3 years before it becomes too expensive to keep it going. We further estimate that at the end of the three years we will be able to sell it for $3,000. This $3,000 is the estimated salvage value (also termed the residual value).

Accumulated Depreciation is an enigmatic account for many students. It is a valuation account. It is also a contra account. Now lets see what it really is. The truck account will remain the same, $30,000, until we sell or trade in the truck. The amount of depreciation we take on the truck will accumulate over the years we own it in the Accumulated Depreciation account. The cost minus the accumulated depreciation of any fixed asset is known as its book value. Consider the P & L and the Balance Sheet for each of the following years:

P&L Year 1 Year 2 Year 3

Sales

Cost of Good Sold

Gross Margin

Operating Expenses:

Xxxxx Expense

Xxxxx Expense

Depreciation Expense 9,000 9,000 9,000

Balance Sheet

Current Assets

Xxxxxxx

Xxxxxxx

Xxxxxxx

Total Current Assets

Fixed Assets

Truck 30,00030,000 30,000

Less: Accumulated

Depreciation < 9,000>

Net Fixed Assets 21,000 12,000 3,000

If we originally purchased the truck at a point in the year other than the beginning, we would adjust our depreciation for the period we used it. Many companies have special rules for these situations. A common one is that the company takes 1/2 of a years depreciation in the year they buy the asset, no matter when in the year that occurs, and they take 1/2 of a years depreciation in the year they sell the asset, again, no matter when in the year that occurs.

Hobsons Choice Module #3 Friends come and go,

exacerbate but enemies accumulate.

(Thomas F. Jones, Jr.)

Earnings per Share

Primary and diluted

Convertible bonds, stock options and so forth

As if.

But never mind- we will only use basic..

The Formula

Samsun Company earned $100,000 last year. The company had 5,000 shares of common stock outstanding on January 1, sold 8,000 shares on April 1 and sold 4,000 shares on

October 1. Calculate the EPS for Samsun.

Ryan Corporation had 100,000 shares outstanding at the beginning of the year. On April 1, they issued 12,000 shares, on June 30, they issued 16,000 shares and on October 1, they issued 8,000 shares. The Company earned $300,000 for the year. What was the EPS?

Depreciation

What it is, is

You bought a new truck to use to deliver the Whatevers that you sell. The truck cost $30,000, will last for 4 years. At the end of 4 years, you figure you could sell it for $2,000.

Formula for Straight-Line Depreciation:

Goes on the Balance Sheet

Inventories

Specific Identification

Weighted Average

FIFO means ___________ ___, __________ _____.

The Inventory Turn is ----

And taking it one step further----------

Gives us a_________________ d_______ s__________ in i___________.

Before the homework--- Bubble Guppies---- current portion of long-term debt

And what about the dividend????

Time Value of Money

You have a choice- $100 today, $107 in one year or $115 in two years. You do not need money today and the money is safe if you decide to take it later. How would you make this decision?

Present value

First, back to an easy future value problem, how much will you have in one year if you put $100 in the bank today and the bank pays interest compounded annually at 10%?

How much do you need to put in the bank today to have $110 in one year if the bank pays interest at 10%, compounded annually?

What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually?

The formula for present value

How to use the calculator:

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded annually?

2nd CLR TVM

1000 FV

3 N

10 I/Y

CPT PV

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded semi-annually?

2nd CLR TVM

1000 FV

3 X 2= N

102= I/Y

CPT PV

How about wanting $50,000 in 10 years bank pays interest 16% payable quarterly?

Or 2nd CLR TVM

50000 FV

10 X 4= N

164= I/Y

CPT PV

The tutorials and instruction book for your calculator make some easy calculations very difficult. If you do one or two additional steps, it all becomes easy.

First, some basics

The third line of the calculator is the one we will be using the most.

N is the number of compounding periods

I/Y is the interest rate per compounding period

PV is the present value

PMT is the payment per period

FV is the future value

To set your decimal points

2nd Format (bottom middle key)

Enter number of decimal points you want to use.

Enter (top line second key)

Future Value Problems

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded annually?

1) 2nd clr tvm

2) 100 PV

3) 1 N

4) 10 I/Y

5) CPT FV FV = -110.00

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded semi-annually?

1) 2nd clr tvm

2) 100 PV

3) 2 N

4) 5 I/Y

5) CPT FV FV = -110.25

Present Value Problems

What is the present value of $1,000 to be paid to me in 2 years, bank pays interest annually at 10%.

2nd CLR TVM

1000 FV

2 N

10 I/Y

Cpt PV -826.45

What is the present value of $1,000 to be paid to me in 2 years, bank pays interest of 10% semi-annually?

2nd CLR TVM

1,000 FV

4 N

5 I/Y

Cpt PV -822.70

Payments

You want to buy a new car. The cost is $50,000. You make 5 equal annual payments which include interest at 10%. How much are the payments?

2nd CLR TVM

50,000 PV

5 N

10 I/Y

Cpt PMT -13,189.87

What would the payments be if they were monthly?

2nd CLR TVM

50,000 PV

5X12 = N

10/12 = I/Y

Cpt PMT -1,062.35

Differential Interest

Bob will sell you a DooDad for $10,000 payable in 3 equal annual payments which include interest at 2%. The bank would charge you 10% for the same loan. How much are you really paying for the DooDad?

2nd CLR TVM

10,000 PV

3 N

2 I/Y

Cpt PMT

10 I/Y

Cpt PV 8,623.28

How much would you pay for a 10 year, 100,000 bond, 10% interest payable annually, to earn 8% interest?

2nd CLR TVM

100,000 FV

10 N

.10 X 100,000 = PMT

8 I/Y

Cpt PV 113,420.16

You are buying a 10 year, $100,000 Note issued 5 years ago. The Note is being paid in equal annual payments which included interest at 10%. Current interest rates are 12%. The Note has exactly 5 years of payments left and you will get the first in 1 year. How much do you pay to earn 12%?

2nd CLR TVM

100,000 PV

10 N

10 I/Y

Cpt PMT

5 N

12 I/Y

Cpt PV 58,666.07

Problems

1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank pays interest at 4% compounded annually?

2) Compounded semi-annually?

3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8% compounded annually?

4) What if you want $1,000,000 in 20 years at 12% compounded semi-annually?

5) Problem 4 compounded quarterly?

Annuities

1) How much do you need to put in the bank today so you can take out $100 per year

for each of the next two years? The bank pays interest at 12% compounded

annually. You will make your first withdrawal exactly one year from today.

2) How about $1,000 per year for next 4 years, bank pays interest at 10% compounded

annually?

3) How much do you need to put in the bank today so you can take out $10,000 per year for the next five years? The bank pays interest at 8% compounded annually.

4) How about $100 for 10 years, same bank and interest?

5) How about $500 per year for the next 30 years, bank pays interest at 8%, compounded annually?

Module 3 Homework

Bubble Guppies, Inc.

Listed below are the accounts for Bubble Guppies, Inc. at December 31, 2013 and their balances.

Accounts Payable

$ 40,000

Accounts Receivable

143,000

Accumulated Depreciation

85,000

Advertising Expense

8,000

Building

200,000

Cash

185,000

Common Stock

210,000

Cost of Goods Sold

440,000

Equipment

100,000

Interest Expense

Insurance Expense

8,000

3,000

Inventory

62,000

Depreciation Expense

46,000

Note Payable

Prepaid Rent

100,000

4,000

Rent Expense

36,000

Retained Earnings

272,000

Sales

880,000

Salaries Payable

Salary Expense

8,000

200,000

Security Deposit

40,000

Tax Expense

38,000

Taxes Payable

19,000

Utilities Expense

12,000

Bubble Guppiess beginning balance (12/31/12) in Retained Earnings was $193,000 and the beginning Common Stock balance was $60,000. The company had 6,000 shares of common stock outstanding at the beginning of the year. The corporation issued 4,000 shares of common stock on April 1, 2013. The Note Payable requires annual payments of $20,000 on principal plus interest at 8% on December 31st. During the year the company paid a $10,000 dividend.

Prepare financials statements (3) for Bubble Guppiess

There are more Problems on the next page

Problem 2

How much do I need to deposit in the bank today at 8% compounded quarterly so that I will have $100,000 one year from today?

Problem 3

How much do I need to invest today at 4% compounded annually in order to have $1,000,000 five years from today?

Problem 4How much do I need to put in the bank today in order to have $10,000 two years from today if interest is 8% compounded semi-annually?

Problem 5

The Arsen Co. earned $500,000 last year. The company had 100,000 shares outstanding on January 1, sold 6,000 shares on July 1 and sold 6,000 shares on October 1. The Arsen Co. stock sells for $50 per share. Calculate the EPS.

ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY

WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY

Frederick Schiller

Module 4

What built this country over time is tens of thousands of people who want to live better tomorrow than they did today and go to work on it.

Warren Buffett

Payments and amortizations

You are buying a Mercedes for $65,000. You pay $5,000 down and will pay the rest in five annual payments of $15,027.39 beginning one year from today. The payments include interest at 8%. Prepare an amortization schedule.

How did I get the payment amount?

Now Amortize the loan

Ending or Unpaid

Applied to Principal

Periods Payments Interest 8% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 15,027.39_______________________________________________

2________________________________________________________

3________________________________________________________

4________________________________________________________

5________________________________________________________

Go back to the Mercedes- how would we do monthly payments?.......

Now Amortize the loan

Ending or Unpaid

Applied to Principal

Periods Payments Interest 12% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 _______________________________________________________

2________________________________________________________

3________________________________________________________

4________________________________________________________

5________________________________________________________

6________________________________________________________

Sharon wants to buy a new red dress (which her dad and uncle think is way too short and too tight). The cost is $600, 10% down and the rest in 3 equal annual payments which include interest at 8%. How much are the payments? Prepare an amortization schedule.

You want to buy a cow. Price is $10,000 to be paid $1,000 down and the rest in three equal annual installments which include interest at 10%. How much are the payments? Prepare an amortization schedule.

You have just purchased a new car for $40,000. You pay no money down and will make 60 equal monthly payments starting next month. The interest rate is 12% per year. Amortize the first three months of your loan. (Did you get $889.78 as your payments?)

Professional tip # 1 Honor the ____________________________.

#2 Business lunches are not for e_________________!! Decide what you want

B___________ you g____ t______.

# 3 At the restaurant- show some ________________.

Dont c___________ the _____________!!

If you cant a_______________ t__ b__ t__________, DONT G___!

And never, ever, take home ______________________________!!

Module 4 Homework

Problem 1

John wants to buy a new gas Barbeque. The cost is $659.98. He will have to pay for it

with10% down and 5 equal annual payments that include interest at 10%. Calculate the

payments. Amortize the payments.

Problem 2

You, on the other hand, want a new Jeep. The cost is $ 29,000. You pay 5% down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Problem 3

Megan has just purchased a new goat. The cost was $ 1,000. She paid 10% down and will pay the rest in 4 equal annual installments which include interest at 6%. Calculate her payments and prepare an amortization schedule

Problem 4

You want to buy a bus. The cost is $769,000. You pay $69,000 down and the rest in five equal annual payments which include inter