ACCT 504 Final Exam Solutions 100% Correct Answers

 

Note:

ACCT 504 Final exam 2017 Newly Taken

 

1.(TCO D) Please describe the purpose of the Income Statement and the interrelationship between the income statement and the other major financial statements that we covered in this class. In your answer, please also address which financial statements should be created before the Income Statement, if any, and which financial statements need to be completed after the Income Statement, if any. (Points : 25)

Question 2. 2.(TCO E) Your friend, Lisa, plans to open a nail salon. Lisa states that she does not have time to develop and implement a system of internal controls.
(a) Explain to Lisa the components of internal control. (10 points)
(b) Explain to Lisa at least 5 internal control procedures she must establish to protect herself against fraud. You should state specific internal control procedures from the textbook, and relate your answer to her nail salon business. (15 points) (Points : 25)

 

Question 3. 3.(TCO A) The following items are taken from the financial statements of PQR Company for 2013:

Cash $100,000
Inventory 150,000
Accounts Payable 123,000
Accounts Receivable 40,000
Supplies 10,000
Salaries Payable 30,000
Unearned Revenue 75,000
Intangible assets 78,000
Property, plant, and equipment, net 156,000
Long term debt 50,000
Common Stock 25,000
Additional Paid in Capital 175,000
Retained Earnings, 12/31/2012 13,000
Service revenue 402,000
Cost of Goods Sold 250,000
Rent expense 48,000
Supplies expense 25,000
Insurance expense 36,000

Instructions:

(1) Create a classified balance sheet in good form for the year ended 2013. (30 points)

(2) Calculate the current ratio and debt ratio and explain your findings. (6 points) (Points : 20)

 

Question 4. 4.(TCO B) The Delta Company gathered the following condensed data for the year ended December 31, 2014:

Cost of goods sold $300,000
Net sales 525,000
Administrative expenses 110,000
Interest expense 18,000
Common stock dividends paid 25,000
Selling expenses 52,000
Income tax percentage 33%

Instructions:
(1) Prepare a multiple-step income statement for the year ended December 31, 2014. (30 points)

(2) Compute the gross margin percentage and net profit margin ratio. Delta Company’s assets at the beginning of the year were $800,000, and the total assets were $1,000,000 at the end of the year. To qualify for full credit, you must state the formula you are using, show your computations, and explain your findings. (6 points) (Points : 20)

 

Question 5. 5.(TCO C) This is a 2-part question.

Part 1) Indicate which section of the statement of cash flows should contain each of the following items, and whether each item would result in an inflow or outflow of cash. The sections are Operating, Investing, and Financing. (30 points)

(a) Amortization of a patent
(b) Increase in accounts payable
(c) Paid cash dividends to common stockholders
(d) Purchased equipment with cash
(e) Increase in inventory

Part 2) Please explain how to calculate free cash flow and the importance of free cash flow to investors. (6 points) (Points : 20)

 

Question 6. 6.(TCO F) This is a 2-part question.

Part 1) Journalize the adjusting entries below at year-end December 31, XXXX. Please share your supporting calculations for the adjusting entries requiring computations.

(a) Beginning prepaid insurance, $500. Payments for insurance during the period are $900. Ending prepaid insurance is $600.
(b) Interest revenue of $1,500 has been earned but not yet received.
(c) Accrued Service Revenue of $12,000
(d) The weekly payroll is $20,000. Employees are owed for 4 days of a 5-day work week.
The unadjusted balance of the Supplies account is $1,200. The total cost of supplies remaining is $300.
(f) Equipment was purchased at the beginning of the year for $25,000. The equipment’s useful life is 5 years, and the residual value is $5,000. Record the depreciation for this year.
(30 points)

Part 2) Calculate the overall overstatement or understatement of net income if the above adjusting entries were not made. Please share your work. (6 points) (Points : 20)

 

Question 7. 7.(TCO G) Please review the following 6 ratios for Johnson Company and Lee Enterprises for the year ended 2014, and address the 2 questions below.

Ratio Name Johnson Company Lee Enterprises
(a) Accounts receivable turnover 6.5 5.3
(b) Days’ inventory outstanding 40 35
(c) Debt ratio 29.3% 25.7%
(d) Return on common stockholders’ equity 14.7% 10.5%
(e) Current ratio 2.50 3.60
(f) Price/Earnings ratio 10 12

Instructions: This is a 2-part question.

(1) Explain the meaning of each of the Johnson Company ratios above. (18 points)
(2) State which company performed better for each ratio. (18 points) (Points : 20)

 

(TCO A) Which one of the following is an advantage of corporations relative to partnerships and sole proprietorships? (Points : 5)
Reduced legal liability for investors
Harder to transfer ownership
Lower taxes
Most common form of organization

 

(TCO A) When a corporation distributes a dividend, _____. (Points : 5)
the most common form of distribution is a cash dividend
the Dividends account will be increased with a credit
the Retained Earnings account will be directly increased with a debit
the Dividends account will be decreased with a debit

 

(TCOs A, B) Below is a partial list of account balances for Cerner Company:

Cash $5,000
Prepaid insurance 500
Accounts receivable 2,500
Accounts payable 2,000
Notes payable 3,000
Common stock 1,000
Dividends 500
Revenues 15,000
Expenses 12,500

 

Under the accrual basis of accounting, revenues are recorded and reported _____.
when companies receive payments for jobs performed or products provided
when companies have provided products or performed services
when companies receive payments prior to providing products or performing services
when companies receive payments after providing products or performing services

 

In a period of increasing prices, which inventory cost flow assumption will result in the highest amount of net income?
LIFO
The average cost method
FIFO

 

Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94. The journal entry to record the issuance will show a _____.
debit to Cash of $100,000
credit to Bonds Payable of $94,000
credit to Premium on Bonds Payable of $4,000
debit to Discount on Bonds Payable of $6,000

 

What did Cerner Company show as total credits? (Points : 5)
$21,500
$21,000
$20,500
$22,000

 

(TCOs B, E) Using accrual accounting, expenses are recorded and reported only _____. (Points : 5)
when they are incurred, whether or not cash is paid
when they are incurred and paid at the same time
if they are paid before they are incurred
if they are paid after they are incurred

 

(TCO D) Three companies report the same cost of goods available for sale, but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using _____. (Points : 5)
LIFO will have the highest ending inventory
FIFO will have the highest cost of goods sold
All three companies will have the same value for ending inventory.
average cost will have an ending inventory value that falls between FIFO and LIFO

 

(TCOs A, E) Equipment with a cost of $192,000 has an estimated salvage value of $18,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? (Points : 5)
$48,000
$52,500
$49,500
$43,500

 

(TCOs D, G) Joyce Corporation issues 1,000 ten-year, 8%, $1,000 bonds dated January 1, 2007, at 102. The journal entry to record the issuance will show a _____. (Points : 5)
debit to Cash of $1,020,000
debit to Discount on Bonds Payable for $20,000
credit to Bonds Payable for $1,020,000
credit to Cash for $1,000,000

 

(TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $240,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows is _____. (Points : 5)
$240,000
$250,000
$310,000
$230,000

 

(TCO F) One variation of the horizontal analysis is known as _____. (Points : 5)
nonlinear analysis
vertical analysis
trend analysis
common-size analysis

 

(TCO F) Comparisons of data within a company are an example of the following comparative basis. (Points : 5)
Industry averages
Intercompany
Intracompany
Interregional

 

(TCO F) Which one of the following is not a characteristic generally evaluated in ratio analysis? (Points : 5)
Liquidity
Profitability
Marketability of the product
Solvency

 

(TCO F) Short-term creditors are usually most interested in assessing _____. (Points : 5)
solvency
liquidity
marketability
profitability

 

(TCO F) Long-term creditors are usually most interested in evaluating _____. (Points : 5)
liquidity
marketability
profitability
solvency

 

(TCO G) To calculate the market value of a bond, we need to _____. (Points : 5)
find out the present value of all of the future cash payments promised by the bond
calculate the present value of the principal only
calculate the present value of the interest only
multiply the bond price by the interest rate

 

(TCO A) Below you will find selected information (in millions) from Coca-Cola Co.’s 2012 Annual Report:
…………………………………………………………………………………………………………………………………………………….

Required:
1. Using the information provided prepare a Balance Sheet. Separate the current assets from non-current assets and provide a total for each. Also separate the current liabilities from the non-current liabilities and provide a total for each.
2. Using the Balance Sheet from your answer above calculate; Current Ratio, Days in Inventory, Average Collection Period, Return on Assets Ratio, Debt to Total Assets and Return on common stockholders’ equity ratio. (Make sure to show all your work)

 

 

(TCO B) The following selected data was retrieved from the Wal-Mart, Inc. financial statements for the year ending January 31, 2013:
………………………………………………………………………………………………………………………………………………………………………………………………

Required:

Using the information provided above:
1. Prepare a multiple-step income statement
2. Calculate the Profit Margin, and Gross profit rate for the company. Be sure to provide the formula you are using, show your calculations, and discuss your findings/results.

 

(TCO C) Please review the following real-world Hewlett Packard Statement of Cash flows and address the 2 questions below:

……………………………………………………………………………………………………………………………………………………………………………………….

Required:

1) Please calculate the percentage increase or decrease in cash for the operating, investing, and financing sections and explain the major reasons for the increase or decrease for each of these sections.

 

2) Please calculate the free cash flow for 2012 and explain the meaning of this ratio.

 

4. (TCO D) You are CFO of Goforit, Inc., a wholesale distribution company specializing in emerging technologies. Your CEO is a brilliant marketer, but relies on you to explain issues and choices in accounting and finance. She has heard from other members of a CEO organization to which she belongs that a company’s net income can vary widely depending on which accounting choices are made from the “GAAP menu.”

 

Assuming the goal is to maximize net income, choose an accounting treatment from each of the following scenarios, and explain to your CEO why the choice will produce the desired effect on reported Net Income for the current year. Include in your answer the effect of the choice on both the income statement and balance sheet.

Required:

a. Goforit carries significant electronics inventory in a competitive environment where prices are actually falling. Which inventory valuation method would you choose—LIFO, FIFO, or average cost? Assume that unit purchases exceed unit sales.
b. Goforit has a large investment in warehouse equipment including conveyor belts, forklifts, and automated packaging systems. Which depreciation method would you choose: Straight line (SL) or double declining balance (DDB)?

 

(TCO F) Please review the following real-world ratios for Johnson & Johnson and Pfizer for the year ended 2012 and address the 2 questions below.

…………………………………………………………………………………………………………………………………………………………………………………………

Required:

1) Please explain the meaning of each of the Pfizer ratios above.

2) Please state which company performed better for each ratio.