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BARUCH COLLEGE - CUNY

EMBA - INTRODUCTION TO FINANCIAL ACCOUNTING Professor Jan Sweeney Fall 2003

TAKE HOME MIDTERM EXAM

 

This exam must be returned to me by 8.30 am Saturday October 11th 2003

Giving or receiving help on this exam constitutes a breach of the Baruch College honor code

 

1. Many first-time readers of financial statements are confused by what is meant by "accrual accounting." They often assume that financial accounting uses cash as the basis for recording and measuring income and expenses.

 

Required:

How would you explain to a first-time reader of financial statements the differences between cash basis and accrual basis of accounting? Use examples where appropriate.

 

2. Given the following information, indicate the cash flow amounts in the blanks provided.

 

XYZ Company

Income Statement

For the Year Ended December 31, Year 2

 

 

Cash Flow

 

Sales revenue, 75% on credit

$200,000

$__________

   Accounts receivable balance

 

 

      December 31, Year 1, $50,000

 

 

      December 31, Year 2, $60,000

 

 

 

Cost of good sold, 100% on credit

$ 60,000

$__________

   Accounts payable balance

 

 

      December 31, Year 1, $15,000

 

 

      December 31, Year 2, $12,000

 

 

 

Expenses:

 

 

   Salaries and Wages

$ 26,000

$__________

      Accrued wages payable balance

 

 

         December 31, Year 1, $1,500

 

 

         December 31, Year 2, $1,600

 

 

 

   Depreciation expense

$  2,500

$__________

   Rent expense

$  1,500

$__________

      No accruals

 

 

 

   Income tax expense

$  5,500

$__________

      Taxes payable balance

 

 

         December 31, Year 1, $1,000

 

 

         December 31, Year 2, $2,000

 

 

   Total expenses

$ 35,500

 

Net income

 

$  104,500

 

Cash flow from operating activities

 

$         

 

 

3. If the following transactions were recorded after the preparation of the statement of cash flow, identify what section(s) of the statement would be affected by the transaction and whether the transaction would be an increase or decrease to cash for that section.

a.

Issue bonds for equipment

b.

Pay dividends with cash

c.

Sell merchandise on account

d.

Amortize goodwill

e.

Issue stock dividend

 

 

 

 

4. All-Things Inc. manufactures a variety of consumer products. The company's founders have managed the company for thirty years and are now interested in retiring. Consequently, they are seeking to sell the company. Trial Associates is looking into the acquisition of All-Things and has requested the latest financial statements and selected financial ratios in order to evaluate All-Things' financial stability and operating efficiency. The summary information provided by All-Things is presented below.

 

All-Things Inc.

Income Statement

For the Year Ended May 31,Year 6

(In thousands)

Sales (net)

$30,500

Interest income

   500

   Total revenue

$31,000

 

Costs and expenses:

 

Cost of goods sold

17,600

Selling and administrative expense

3,550

Depreciation and amortization expense

1,890

Interest expense

   900

   Total costs and expenses

$23,940

 

   Income before taxes

7,060

 

Income taxes

 2,900

Net income

$ 4,160

 

 

Selected Financial Ratios

 

 

 

Current

 

All-Things

Industry

 

Year 4

Year 5

Average

Current ratio

1.62  

1.61  

1.63  

Acid-test ratio

.63  

.64  

.68  

Total asset turnover

1.83  

1.84  

1.84  

Inventory turnover

3.21  

3.17  

3.18  

Times interest earned

8.50  

8.55  

8.45  

Total debt to net worth

1.02  

.86  

1.03  

Net profit margin

12.1% 

13.2% 

13.0% 

 

 

 

All-Things Inc.

Comparative Statement of Financial Position

As of May 31

(In thousands)

 

Year 6

Year 7

Cash

$ 400

$ 500

Marketable securities (at cost)

500

200

Accounts receivable (net)

3,200

2,900

Inventory

  5,800

  5,400

   Total current assets

$ 9,900

$ 9,000

Property, plant, and equipment (net)

7,100

  7,000

   Total assets

$17,000

$16,000

 

 

 

Accounts payable

$ 3,700

$ 3,400

Income taxes payable

900

800

Accrued expenses

  1,700

  1,400

   Total current liabilities

$ 6,300

$ 5,600

Long-term debt

  2,000

  1,800

   Total liabilities

$ 8,300

$ 7,400

 

 

 

Common stock ($1 par value)

2,700

2,700

Paid-in-capital in excess of par

1,000

1,000

Retained earnings

  5,000

  4,900

   Total shareholders' equity

$ 8,700

$ 8,600

   Total liabilities and shareholders' equity

$17,000

$16,000

 

Required:

a.

Calculate a new set of ratios for the fiscal Year 6 for All-Things Inc. based on the financial statements presented.

b.

Briefly explain the analytical use of each seven ratios presented, describing what the investors can learn about All-Things Inc.'s financial stability operating efficiency.

c.

Identify two limitations of ratio analysis.

 

 

5. The sales, all on account, of the Pins Company in Year 6, its first year of operations, were $700,000. Collections totaled $500,000. On December 31, Year 6, Pins Company estimated that 2 percent of all sales would probably be uncollectible. On that date, Pins Company wrote off specific accounts in the amount of $8,000.

 

Pins Company's unadjusted trial balance (after all nonadjusting entries were made and after all write-offs of specific accounts receivable identified during Year 7 as being uncollectible) on December 31, Year 7, includes the following accounts and balances:

 

Accounts Receivable (Dr.)

$300,000

Allowance for Uncollectible Accounts (Dr.)

10,000

Sales (Cr.)

800,000

 

On December 31, Year 7, Pins Company carried out an aging of its accounts receivable balances and estimated that the Year 7 ending balance of accounts receivable contained $9,000 of probable uncollectibles. It made adjusting entries appropriate for this estimate. Some of the $800,000 sales during Year 7 were for cash and some were on account; the omission is purposeful.

 

Required:

a.

What was the balance in the Accounts Receivable account at the end of Year 6? Give the amount and whether debit or credit.

b.

What was the balance in the Allowance for Uncollectible Accounts account at the end of Year 6? Give the amount and whether debit or credit.

c.

What was bad debt expense for Year 7?

d.

What was the amount of specific accounts receivable written off as being uncollectible during the year Year 7?

e.

What were total cash collections in Year 7 from customers (for cash sales and collections from customers who had purchased on account in either Year 6 or Year 7)?

f.

What was the net balance of accounts receivable included in the balance sheet asset total for December 31, Year 7?

 

 

6. The Furmanov Company started business on January 1, Year 7. It recognizes revenue and expense at the time of sale for financial reporting and uses the installment method for income tax reporting. Under the installment method, the firm recognizes revenue when it receives cash, and matches expenses with revenues based on the average cost of goods sold to sales percentage for the year in which the firm made the sale. The income tax rate is 30%. Data for Year 7 and Year 8 as reported to shareholders, appear below:

 

 

Year 7

Year 8

Net sales on account

$2,400,000

$3,000,000

Cash collections of Year 7 sales

1,620,000

480,000

Cash collections of Year 8 sales

-

2,040,000

Cost of merchandise sold

1,440,000

1,920,000

All other (period) expenses

240,000

360,000

 

Required:

 

a.

Compute the amount of net income after taxes for financial reporting for Year 7 and Year 8.

b.

Compute the amount of taxable income for Year 7 and Year 8.

 

 

7. Most transactions a company engages in are considered recurring and related to its primary operating activity. Some transactions do not fit into this category.

 

Required:

a.

How might you classify a loss from an earthquake or the sale of an operating division (at a loss) in relation to primary operating activities?

b.

Why are such transactions separated from primary operating activities?