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.
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XYZ Company Income Statement For the Year Ended December 31, Year 2 |
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Cash
Flow |
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Sales revenue, 75% on credit |
$200,000 |
$__________ |
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Accounts receivable
balance |
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December
31, Year 1, $50,000 |
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December
31, Year 2, $60,000 |
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Cost of good sold, 100% on credit |
$ 60,000 |
$__________ |
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Accounts payable
balance |
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December
31, Year 1, $15,000 |
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December
31, Year 2, $12,000 |
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Expenses: |
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Salaries and Wages |
$ 26,000 |
$__________ |
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Accrued
wages payable balance |
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December
31, Year 1, $1,500 |
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December
31, Year 2, $1,600 |
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Depreciation expense |
$ 2,500 |
$__________ |
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Rent expense |
$ 1,500 |
$__________ |
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No accruals |
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Income tax expense |
$ 5,500 |
$__________ |
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Taxes
payable balance |
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December
31, Year 1, $1,000 |
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December
31, Year 2, $2,000 |
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Total expenses |
$ 35,500 |
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Net income |
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$ 104,500 |
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Cash flow from operating activities |
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$ |
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.
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a. |
Issue bonds for equipment |
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b. |
Pay dividends with cash |
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c. |
Sell merchandise on account |
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d. |
Amortize goodwill |
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e. |
Issue stock dividend |
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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.
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All-Things Inc. Income Statement For the Year Ended May 31,Year 6 (In thousands) |
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Sales (net) |
$30,500 |
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Interest income |
500 |
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Total revenue |
$31,000 |
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Costs and expenses: |
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Cost of goods sold |
17,600 |
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Selling and administrative expense |
3,550 |
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Depreciation and amortization expense |
1,890 |
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Interest expense |
900 |
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Total costs and
expenses |
$23,940 |
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Income before taxes |
7,060 |
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Income taxes |
2,900 |
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Net income |
$ 4,160 |
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Selected Financial Ratios
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Current |
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All-Things |
Industry |
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Year
4 |
Year
5 |
Average |
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Current ratio |
1.62 |
1.61 |
1.63 |
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Acid-test ratio |
.63 |
.64 |
.68 |
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Total asset turnover |
1.83 |
1.84 |
1.84 |
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Inventory turnover |
3.21 |
3.17 |
3.18 |
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Times interest earned |
8.50 |
8.55 |
8.45 |
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Total debt to net worth |
1.02 |
.86 |
1.03 |
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Net profit margin |
12.1% |
13.2% |
13.0% |
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All-Things Inc. Comparative Statement of Financial
Position As of May 31 (In thousands) |
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Year 6 |
Year 7 |
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Cash |
$ 400 |
$ 500 |
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Marketable securities (at cost) |
500 |
200 |
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Accounts receivable (net) |
3,200 |
2,900 |
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Inventory |
5,800 |
5,400 |
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Total current assets |
$ 9,900 |
$ 9,000 |
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Property, plant, and equipment (net) |
7,100 |
7,000 |
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Total assets |
$17,000 |
$16,000 |
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Accounts payable |
$ 3,700 |
$ 3,400 |
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Income taxes payable |
900 |
800 |
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Accrued expenses |
1,700 |
1,400 |
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Total current
liabilities |
$ 6,300 |
$ 5,600 |
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Long-term debt |
2,000 |
1,800 |
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Total liabilities |
$ 8,300 |
$ 7,400 |
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Common stock ($1 par value) |
2,700 |
2,700 |
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Paid-in-capital in excess of par |
1,000 |
1,000 |
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Retained earnings |
5,000 |
4,900 |
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Total shareholders'
equity |
$ 8,700 |
$ 8,600 |
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Total liabilities and
shareholders' equity |
$17,000 |
$16,000 |
Required:
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a. |
Calculate a new set of ratios for the
fiscal Year 6 for All-Things Inc. based on the financial statements
presented. |
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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. |
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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:
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Accounts Receivable (Dr.) |
$300,000 |
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Allowance for Uncollectible Accounts
(Dr.) |
10,000 |
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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. |
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c. |
What was bad debt expense for Year 7? |
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d. |
What was the amount of specific accounts
receivable written off as being uncollectible during the year Year 7? |
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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)? |
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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:
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Year 7 |
Year 8 |
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Net sales on account |
$2,400,000 |
$3,000,000 |
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Cash collections of Year 7 sales |
1,620,000 |
480,000 |
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Cash collections of Year 8 sales |
- |
2,040,000 |
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Cost of merchandise sold |
1,440,000 |
1,920,000 |
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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? |