There should be 6 pages in this exam.

The examination consists of 30 short problem solving and essay questions. Each question carries 2 marks. The maximum score of the examination is 60 marks.

Answer all the questions, write legibly all your answers in the answer sheets and show clearly all supporting computations.

For short essay questions, a short concise answer will receive more credit than a long rambling one.

It is acceptable to provide a series of numbered points rather than a complete essay.

Q.1 Q.6 Q.11 Q.16 Q.21 Q.26  
Q.2 Q.7 Q.12 Q.17 Q.22 Q.27  
Q.3 Q.8 Q.13 Q.18 Q.23 Q.28  
Q.4 Q.9 Q.14 Q.19 Q.24 Q.29  
Q.5 Q.10 Q.15 Q.20 Q.25 Q.30  
Total Score           /60
  1. Selected information from Wellco Company’s 20×1 business results is presented below:

 

                        Net Sales      $1,200
                        Cost of Goods Sold           650
                        Net Income           525
                        Depreciation Expense             20
                        Gain on Sale of Equipment             40
                        Decrease in Accounts Receivable             25
                        Increase in Inventory             100
                        Increase in Accounts Payable               50
                        Cash Interest Paid               45
                        Cash Interest Received             20
                        Dividends Paid               25

 

What is the company’s cash flow from operations?

 

  1. During an accounting period a company had the following sequence of transactions:

 

  • Beginning inventory is 0.
  • The company purchased 500 units at $15 per unit.
  • The company purchased 600 units at $16 per unit.
  • The company sold 950 units at $20 per unit.

 

What would be the amount of the company’s cost of goods sold and ending inventory under FIFO and LIFO, respectively?

 

  1. A company using LIFO reports the following:

 

  • Cost of goods sold was $36,000.
  • The beginning inventory was $6,500 and the ending inventory was $6,200.
  • The beginning LIFO Reserve was $1,800.
  • The ending LIFO Reserve was $2,400.

What would be the best estimate of the company’s cost of goods sold if it uses a FIFO basis?

 

  1. In periods of rising prices and stable or increasing inventory quantities, a company that uses LIFO instead of FIFO is likely to have what effects on its cash flow and net income?

 

  1. Company A capitalizes a lease. Company B is identical to Company A in all ways except that it treats the lease as an operating lease. How would Company B’s cash flow from operations (CFO) and cash flow from financing (CFF) differ from those of Company A?

 

  1. Northern Co. purchased a machine on January 1, 20×1, for $20,000 cash. The machine has an estimated useful life of four years and a residual value of $6,000.  Northern uses the double-declining-balance method of depreciation for all its assets.  What will be the machine’s book value as of December 31, 20×2?

 

  1. A company using straight-line depreciation reports gross investment in fixed assets of $1,500, accumulated depreciation of $500, and annual depreciation expense of $125. Assume that the estimated residual value is 0, then what are the amounts of the average depreciable life (ADL) and the average age (AA) of the fixed assets?

 

  1. The Retained Earnings account of Centrio Co. on January 1, 20×1, had a balance of $300,000. Revenues and Expenses for 20×1 were $450,000 and $300,000, respectively. Dividends of $80,000 were paid during 20×1. What are the Net Income (NI) for 20×1 and the balance of the Retained Earnings account (RE) on December 31, 20×1?

 

  1. There are three long-term construction projects. Construction Project R has an unknown contract price and a reliable cost estimate. Construction Project S has a known contract price and an unreliable cost estimate. Construction Project T has a known contract price and a reliable cost estimate. Which revenue recognition method for Projects R, S and T, respectively, can be used?

 

  1. Paton Construction, Inc. has consistently used the installment sales method of recognizing income. Last year Paton started work on a $4,500,000 construction contract, which was completed this year.  The accounting records the following data for last year:

 

  • Advanced billings …………………………………………….. $1,650,000
  • Costs incurred ………………………………………………… 1,350,000
  • Cash collections ………………………………………………. 1,050,000
  • Estimated additional cost to complete the contract …………… 2,700,000

 

How much profit should Paton have recognized on this contract last year?

 

  1. A company has a receivables turnover of 10, an inventory turnover of 13, and a payables turnover of 11. What is the company’s cash conversion cycle? If the company’s payables turnover ratio increases from 11 to 12, what will be the effect on the company’s cash conversion cycle?

 

  1. Selected information from the 20×2 and 20×1 financial statements of Anson Company is presented below:

As of December 31

20×2                20×1

Cash                                                                                        $ 21,000          $ 35,000

Accounts receivable (net)                                                        107,000           113,000

Inventory                                                                                    70,000             88,000

 

Sales                                                                                       1,100,000        1,116,500

Cost of Goods Sold                                                                    817,650           922,720

Net Income                                                                                  30,000             38,000

 

What are Anson Company’s accounts receivable turnover and inventory turnover for 20×2?

 

 

  1. If a company issues bonds at a discount and it uses the effective interest method to account for interest and discount amortization, how will the bond’s interest expense and its carrying value behave over the term of the bond issue?

 

  1. If a company’s initial current ratio is greater than one, what will be the effect on its current ratio if it pays off its accounts payable from cash?

 

  1. Patek Corp. has an operating profit margin (i.e., Operating Profit/Sales) of 8 percent on sales of 2 million. When Patek’s sales increased to 2.5 million, its operating profit margin rose to 10 percent.  What is Patek’s operating leverage?

 

  1. An analyst has gathered the following information about a company:

 

20×2          20×1

  • Net profit margin      05     0.06
  • Asset turnover 5       1.8
  • Financial leverage 5       1.5

 

What are the company’s return on equity (ROE) for 20×1 and 20×2?

 

  1. In question 16, would the analyst be more likely to increase the estimated stock value of this company on the basis of the change of ROE between 20×1 and 20×2? [Hint: Explain what the changes in the ROE means.]

 

  1. Shown below are comparative financial statements for the Watson Corporation:

 

Balance Sheet

        Assets                      20×1         20×0           Liabilities                  20×1            20×0
       Cash                    $ 20,000     $ 20,000 Accounts
       Short-term payable                $  50,000      $  54,000
       investments          25,000          25,000 Mortgage
       Accounts payable                    25,000          25,000
       receivable            50,000           44,000 Bonds payable          60,000          60,000
       Inventory               60,000         52,000          Equipment-net     240,000       240,000  Total                     $135,000      $139,000
       Total assets         $395,000     $381,000 Stockholders’ equity
  Common stock      $180,000      $180,000
  Retained earnings     80,00        62,000
  Total                      260,000        242,000

Total liabilities and

  stockholders’equity$395,000     $381,000

 

Income Statement items for 20×1

Net sales                                 $300,000                 Cost of goods sold                     210,000

Net income                                $  15,000

 

What are Watson’s return on assets ratio and return on equity ratio for 20×1?

 

  1. A company leased a machine having an expected useful life of 10 years. The lease is a 10year lease with annual payments of $2,750 paid at the end of each year. There is a guaranteed residual value of $4,000 at the end of the lease. The present value of the lease discounted at the appropriate interest rate (9 percent) is $20,000. If the company used straight-line depreciation, what was the amount of its first year reported total lease-related expense?

 

  1. Vox Company depreciates its machinery using a capital allowance for income tax reporting and the straight-line method for financial statement reporting. For the 20×1 calendar year, depreciation of machinery amounted to $650,000 under the capital allowance and $435,000 under the straight-line method. This temporary difference will reverse over the next two years, with straight-line being greater by $90,000 and $125,000 in 20×2 and 20×3, respectively. Taxable income in 20×1 was $40,000. Income tax rates are 35% in 20×1, 30% in 20×2, and 25% in 20×3. Vox uses liability method to account for deferred tax items. Assume that there will be sufficient income in each future year to realize any taxable amount, what amount should be reported as deferred tax liability (DTL) at December 31, 20×1?

 

  1. The books of the Catman Company for the year ended December 31, 20×1, showed pretax financial income of $550,000. In calculating the taxable income for income tax purposes, the following temporary differences must be taken into account:

 

Depreciation deducted for tax purposes in excess of depreciation recorded

on the books (this will reverse evenly during the next two years) . . . . . . . $46,000             Income from cash received from rent for tax purposes in excess of rent revenue                 recognized on the books (this will reverse next year) . . . . . . . . . . . . . . . . $32,000

 

Income tax rates are 30% in 20×1, 30% in 20×2, and 35% in 20×3. Catman uses the liability method to account for deferred tax items. Catman did not pay any tax during 20×1. What should Catman record as its income tax payable at December 31, 20×1?

 

  1. On January 2, 20×1, Boren Company bought 15 percentages of Cove Company’s common stock for $60,000 and classified it as available-for-sale securities. Cove’s net income for the years ended December 31, 20×1 and 20×2, were $20,000 and $100,000, respectively. During 20×2, Cove declared a dividend of $150,000. No dividends were declared in 20×1. On December 31, 20×2, the fair value of the Cove common stock owned by Boren had increased to $90,000. How much should Boren show on its 20×2 income statement as income from this investment?

 

  1. On January 2, 20×1, Apex Co. acquired 2,000 shares of Boxy Co. common stock for $9,000. During 20×1, Apex received $6,000 of cash dividends from Boxy. Apex’s share of Boxy’s 20×1 earnings was $7,000. The fair value of Boxy’s common stock on December 31, 20×1, was $5.5 per share. What amount should Apex report in its 20×1 income statement as income from its investment in Boxy if Apex classified these shares as available-for-sale securities and trading securities, respectively?

 

  1. Compared to the equity method, how would the use of the cost method to account for an investment in a profitable firm result in earnings and cash flows?

 

  1. Compared to the consolidation method, how would the use of the equity method to account for a profitable subsidiary affect a parent company’s return on assets (ROA) and return on equity (ROE)?

 

  1. Toaster Inc. owns 15 percent of Foyer Corporation. During the calendar year 20×1, Foyer had net earnings of $500,000 and paid dividends of $100,000.  Roaster mistakenly accounted for the investment in Foyer using the equity method rather than the cost method of accounting.  What effect would this have on the Toaster’s investment account and net income, respectively?

 

  1. On January 1, 20×1, Morton Corp. acquired all the outstanding common stock of Nixon Inc.

by paying the stockholders of Nixon $2,300 in cash. Just prior to the acquisition, the two corporations had the following balance sheets:

 

Morton Corp.                         Nixon Inc.

Book Value                 Book Value             Fair Value

Current assets $ 4,000 $   300 $   300 Equipment (net) $ 9,000 $1,500 $2,000

Total assets                                     $13,000                       $1,800                     $2,300

 

Liabilities                                       $ 2,000                        $   400                     $   350

Common stock                               $ 6,000                        $   800

Retained earnings                           $ 5,000                        $   600

Total liabilities and equity              $13,000                       $1,800

 

What are the amount of total assets and total liabilities as reported on the consolidated balance sheet immediately after the acquisition using a purchase method assumption?

 

  1. United Corporation just appointed Mr. Joseph Leung as the new CFO in December 20×1. In the same month, Mr. Leung decided to assign a higher residual value to existing long term assets of which United Corporation has used straight-line depreciation method. Is Mr. Leung’s decision an ethical violation? Please explain your answer.

 

  1. A finance student states: “I don’t understand why anyone pays any attention to accounting earnings numbers, given that a ‘clean’ number like cash flow from operations is readily available.” Do you agree? Please explain your answer.

 

  1. A finance student argues: “The accounting standards that I like most are the ones that eliminate all management discretion in reporting—that way I get uniform numbers across all companies and don’t have to worry about doing accounting analysis.” Do you agree? Please explain your answer.

 

 

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