Principles of Financial Accounting - Chapter 13 & 14 Test

Which of the following should be added to net income in determining the net cash flows from operating activities using the indirect method?

depreciation expense

The percentage analysis of increases and decreases in individual items in comparative financial statements is called

horizontal analysis

Which of the following is not included in the computation of the quick ratio?

inventory

Horizontal analysis is a technique for evaluating financial statement data

over a period of time

When using the spreadsheet (work sheet) in preparing the statement of cash flows by the indirect method, the Balance columns should total to

zero

A building with a book value of $47,156 is sold for $57,794 cash. Using the indirect method, this transaction should be shown on the statement of cash flows as an increase of

$57,794 in the investing activities section and a deduction of $10,638 from net income in the operating activities section

If a gain of $8,350 is realized in selling (for cash) office equipment having a book value of $54,240, the total amount reported in the investing activities section of the statement of cash flows is

$62,590 Cash Received = Book Value + Gain on Sale = $54,240 + $8,350 = $62,590

Cash dividends of $72,182 were declared during the year. Cash dividends payable were $9,821 at the beginning of the year and $16,872 at the end of the year. The amount of cash paid for dividends during the year is

$65,131 Cash Dividends Paid = Dividends Declared - Increase in Dividends Payable = $72,182 - ($16,872 - $9,821) = $65,131

Land costing $48,976 was sold for $78,499 cash. The gain on the sale was reported on the income statement as "Other revenue." On the statement of cash flows, what amount should be reported as an investing activity from the sale of land?

$78,499

Accounts receivable from sales transactions were $49,631 at the beginning of the year and $66,519 at the end of the year. Net income reported on the income statement for the year was $102,121. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows prepared by the indirect method is

$85,233 Net Cash Flows from Operating Activities = Net Income - Increase in Accounts Receivable = $102,121 - ($66,519 - $49,631) = $85,233

Which of the following increases cash?

borrowing money by issuing a 6-month note

A 10-year bond was issued at par for $250,000 cash. This transaction should be shown on a statement of cash flows as a(n)

financing activity

One reason that a common-sized statement is a useful tool in financial analysis is that it enables the user to

make a better comparison of two companies of different sizes in the same industry

Cash flow per share is

not required to be reported on any statement

The following information is available from the current period financial statements: Net income $123,730 Depreciation expense 26,620 Increase in accounts receivable 17,127 Decrease in accounts payable 23,393 The net cash flows from operating activities using the indirect method is

$109,830 Cash flows from (used for) operating activities: Net income $123,730 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation expense 26,620 Changes in current operating assets and liabilities: Increase in accounts receivable (23,393) Decrease in accounts payable (17,127) Net cash flows from operating activities $109,830

The following information is available from the current period financial statements: Net income $134,491 Depreciation expense 26,912 Increase in accounts receivable 20,938 Decrease in accounts payable 21,534 The net cash flows from operating activities using the indirect method is

$118,931 Cash flows from (used for) operating activities: Net income $134,491 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation expense 26,912 Changes in current operating assets and liabilities: Increase in accounts receivable (20,938) Decrease in accounts payable (21,534) Net cash flows from operating activities $118,931

Privett Company Accounts payable $39,647 Accounts receivable 63,919 Accrued liabilities 6,670 Cash 21,182 Intangible assets 35,647 Inventory 79,584 Long-term investments 93,790 Long-term liabilities 72,724 Marketable securities 34,213 Notes payable (short-term) 25,986 Prepaid expenses 1,026 Property, plant, and equipment 624,676 Based on the data for Privett Company, what is the amount of quick assets?

$119,314 Quick Assets = Accounts Receivable + Cash + Marketable Securities = $63,919 + $21,182 + $34,213 = $119,314

Income tax expense was $368,764 for the year. Income taxes payable was $25,734 and $47,677 at the beginning and end of the year, respectively. Cash payments for income taxes reported on the statement of cash flows using the direct method are

$346,821 Cash Payments for Income Taxes = Income Tax Expense - Increase in Income Taxes Payable = $25,734 - ($368,764 - $47,677) = $346,821

The balance sheets at the end of each of the first 2 years of operations indicate the following: Kellman Company Year 2 Year 1 Total current assets $600,000 $560,000 Total investments 60,000 40,000 Total property, plant, and equipment 900,000 700,000 Total current liabilities 125,000 65,000 Total long-term liabilities 350,000 250,000 Preferred 9% stock, $100 par 100,000 100,000 Common stock, $10 par 600,000 600,000 Paid-in capital in excess of par-common stock 75,000 75,000 Retained earnings 310,000 210,000 Using the balance sheets for Kellman Company, if net income is $250,000 and interest expense is $30,000 for Year 2, what are the earnings per share on common stock for Year 2?

$4.02 Earnings per Share (EPS) on Common Stock for Year 2 = (Net Income ? Preferred Dividends) ÷ Shares of Common Stock Outstanding = [$250,000 - ($100,000 × 9%)] ÷ ($600,000 ÷ $10) = $241,000 ÷ 60,000 = $4.02

The cost of goods sold during the year was $45,919. Inventories were $13,351 and $8,163 at the beginning and end of the year, respectively. Accounts payable (all owed to merchandise suppliers) were $6,590 and $4,009 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total

$43,312 Cash Payments for Merchandise = Cost of Goods Sold - Decrease in Inventories + Decrease in Accounts Payable = $45,919 - ($13,351 - $8,163) + ($6,590 - $4,009) = $43,312

The current period statement of cash flows includes the following: Cash balance at the beginning of the period $453,509 Net cash flows from operating activities 163,994 Net cash flows used for investing activities 53,075 Net cash flows used for financing activities 99,904 The cash balance at the end of the period is

$464,524 Cash Balance at End of Period = $453,509 + $163,994 - $53,075 - $99,904 = $464,524

A company with working capital of $940,000 and a current ratio of 2 pays a $144,000 short-term liability. The amount of working capital immediately after payment is

$940,000 Current Ratio = Current Assets ÷ Current Liabilities = 2 Current Assets = 2 × Current Liabilities Working Capital = Current Assets - Current Liabilities = $940,000 Working Capital = (2 × Current Liabilities) - Current Liabilities Working Capital = 1 × Current Liabilities = $940,000 Current Liabilities = $940,000 ÷ 1 = $940,000 Therefore, Working Capital = Current Assets - $940,000 = $940,000 Current Assets = $940,000 + $940,000 = $1,880,000 Current Assets (after payment of short-term liabilities) = $1,880,000 - $144,000 = $1,736,000 Current Liabilities (after payment of short-term liabilities) = $940,000 - $144,000 = $796,000 Working Capital = $1,736,000 - $796,000 = $940,000

The following information is available for Jase Company: Market price per share of common stock $25.00 Earnings per share on common stock $1.25 Which of the following statements is true?

The price-earnings ratio is 20 and a share of common stock was selling for 20 times the amount of earnings per share at the end of the year. Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock ÷ Earnings per Share on Common Stock = $25.00 ÷ $1.25 = 20

A company reports the following: Cost of goods sold $3,876,300 Average inventory 328,500 Determine (a) the inventory turnover and (b) the days' sales in inventory. Round your answers to one decimal place. Assume a 365-day year. Line Item Description Answer a. Inventory turnover b. Days' Sales in Inventory

a. 11.8 b. 30.9 a. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory = $3,876,300 ÷ $328,500 = 11.8 b. Days' Sales in Inventory = Average Inventory ÷ Average Daily Cost of Goods Sold = $328,500 ÷ ($3,876,300 ÷ 365) = 30.9 days

On the statement of cash flows, the operating activities section would include

cash paid for interest on short-term notes payable

An analysis of a company's ability to pay its current liabilities is called

current position analysis

Accounts receivable resulting from sales to customers amounted to $40,000 and $31,000 at the beginning and end of the year, respectively. Net income reported on the income statement for the year was $120,000. Exclusive of the effect of other adjustments, the net cash flows from operating activities to be reported on the statement of cash flows using the indirect method is

$129,000 Net Cash Flows from Operating Activities = Net Income + Decrease in Accounts Receivable = $120,000 + ($40,000 - $31,000) = $129,000

A company had net income of $238,254 and depreciation expense of $28,929. During the year, accounts receivable and inventory increased by $18,590 and $38,981, respectively. Prepaid expenses and accounts payable decreased by $1,620 and $7,628, respectively. There was also a loss on the sale of equipment of $4,294. How much was the net cash flows from operating activities on the statement of cash flows using the indirect method?

$207,898 Cash flows from (used for) operating activities: Net income $238,254 Adjustments to reconcile net income to net cash flows from (used for) operating activities: Depreciation expense 28,929 Loss on sale of equipment 4,294 Changes in current operating assets and liabilities: Increase in accounts receivable (18,590) Increase in inventory (38,981) Decrease in prepaid expenses 1,620 Decrease in accounts payable (7,628) Net cash flows from in operating activities $207,898

The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments $30,000 Accounts receivable (net) 20,000 Inventory 15,000 Property, plant, and equipment 185,000 Total assets $250,000 Liabilities and Stockholders' Equity Current liabilities $45,000 Long-term liabilities 70,000 Common stock 80,000 Retained earnings 55,000 Total liabilities and stockholders' equity $250,000 Income Statement Sales $85,000 Cost of goods sold (45,000) Gross profit $40,000 Operating expenses (15,000) Interest expense (5,000) Net income $20,000 Number of shares of common stock outstanding 6,000 Market price per share of common stock $20 Total dividends paid $9,000 Cash provided by operations $30,000 What is the asset turnover for Diane Company?

0.34 Asset Turnover = Sales ÷ Average Total Assets = $85,000 ÷ $250,000 = 0.34

Privett Company Accounts payable $37,839 Accounts receivable 61,807 Accrued liabilities 6,803 Cash 22,984 Intangible assets 38,529 Inventory 87,858 Long-term investments 93,494 Long-term liabilities 77,348 Marketable securities 35,199 Notes payable (short-term) 26,460 Prepaid expenses 1,264 Property, plant, and equipment 661,603 Based on the data for Privett Company, what is the quick ratio, rounded to one decimal point?

1.7 Quick Ratio = Quick Assets ÷ Current Liabilities = (Accounts Receivable + Cash + Marketable Securities) ÷ (Accounts Payable + Accrued Liabilities + Notes Payable) = ($61,807 + $22,984 + $35,199) ÷ ($37,839 + $6,803 + $26,460) = $119,990 ÷ $71,102 = 1.7

Richards Corporation had net income of $284,592 and paid dividends to common stockholders of $54,000. It had 58,800 shares of common stock outstanding during the entire year. Richards Corporation's common stock is selling for $70 per share. The price-earnings ratio is

14.46 Price-Earnings (P/E) Ratio = Market Price per Share of Common Stock ÷ Earnings per Share on Common Stock = $70 ÷ ($284,592 ÷ 58,800 shares) = 14.46 times

The following information pertains to Dallas Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Assets Cash and short-term investments $38,029 Accounts receivable (net) 25,854 Inventory 34,203 Property, plant, and equipment 245,940 Total assets $344,026 Liabilities and Stockholders' Equity Current liabilities $58,460 Long-term liabilities 86,369 Common stock, $20 par 116,640 Retained earnings 82,557 Total liabilities and stockholders' equity $344,026 Income Statement Sales $92,004 Cost of goods sold (41,402) Gross profit $50,602 Operating expenses (21,574) Net income $29,028 Shares of common stock 5,832 Market price per share of common stock $20 Dividends per share $1.00 Cash provided by operations $40,000 What is the return on stockholders' equity?

14.6% Average Total Stockholders' Equity = Common stock + Retained earnings = $116,640 + $82,557 = $199,197 Return on Stockholders' Equity = Net Income ÷ Average Total Stockholders' Equity = $29,028 ÷ $199,197 = 14.6%

Based on the following data for the current year, what is the days' sales in receivables? Assume 365 days a year. Sales on account during year $437,735 Cost of goods sold during year 207,351 Accounts receivable, beginning of year 45,059 Accounts receivable, end of year 53,072 Inventory, beginning of year 87,615 Inventory, end of year 113,644 Round your answer up to the nearest whole day.

41 Days' Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = [($45,059 + $53,072) ÷ 2] ÷ ($437,735 ÷ 365 days) = 41 days

Based on the following data for the current year, what is the days' sales in inventory? Sales on account during year $527,543 Cost of goods sold during year 210,793 Accounts receivable, beginning of year 43,221 Accounts receivable, end of year 54,335 Inventory, beginning of year 36,663 Inventory, end of year 36,021 Assume 365 days a year. Do not round interim calculations. Round your final answer up to the nearest whole day.

63 Days' Sales in Inventory = Average Inventory ÷ Average Daily Cost of Goods Sold = Average Inventory ÷ (Cost of Goods Sold ÷ 365 days) = [($36,663 + $36,021) ÷ 2] ÷ ($210,793 ÷ 365 days) = 63 days

Hsu Company reported the following on its income statement: Income before income tax expense $396,745 Income tax expense (119,024) Net income $277,721 Interest expense was $61,747. Hsu Company's times interest earned ratio is

7.43 Times Interest Earned = (Income Before Income Tax Expense + Interest Expense) ÷ Interest Expense = ($396,745 + $61,747) ÷ $61,747 = 7.43

Based on the following data, what is the accounts receivable turnover? Sales on account during year $430,109 Cost of goods sold during year 150,229 Accounts receivable, beginning of year 47,646 Accounts receivable, end of year 46,495 Inventory, beginning of year 80,739 Inventory, end of year 110,501

9.1 Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $430,109 ÷ [($47,646 + $46,495) ÷ 2] = 9.1

State the section(s) of the statement of cash flows prepared by the indirect method (operating activities, investing activities, financing activities, or not reported) and the amount that would be reported for each of the following transactions: Note: Only consider the cash component of each transaction. Use the minus sign to indicate amounts that are cash out flows, cash payments, decreases in cash, or any negative adjustments. If your answer is "not reported" and an amount box does not require an entry, leave it blank or enter "0".

Transaction Amount Activities a. Received $120,000 from the sale of land costing $70,000. Investing activities $120000 a. Received $120,000 from the sale of land costing $70,000. Operating activities $-50000 b. Purchased investments for $75,000. Investing activities $-75000 c. Declared $35,000 cash dividends on stock. $5,000 dividends were payable at the beginning of the year, and $6,000 were payable at the end of the year. Financing activities $-34000 d. Acquired equipment for $64,000 cash. Investing activities $-64000 e. Declared and issued 100 shares of $20 par common stock as a stock dividend, when the market price of the stock was $32 a share. Not reported $0 f. Recognized depreciation for the year, $37,000. Operating activities $37000 g. Issued 85,000 shares of $10 par common stock for $25 a share, receiving cash. Financing activities $2125000 h. Issued $500,000 of 20-year, 10% bonds payable at 99. Financing activities $495000 i. Borrowed $43,000 from Regional Bank, issuing a 5-year, 8% note for that amount. Financing activities $43,000

A company reports the following: Sales $1,252,680 Average accounts receivable (net) 87,600 Determine (a) the accounts receivable turnover and (b) the days' sales in receivables. When required, round your answers to one decimal place. Assume a 365-day year. a. Accounts receivable turnover b. Days' Sales in Receivables

a. 14.3 b. 25.5 a. Accounts Receivable Turnover = Sales ÷ Average Accounts Receivable = $1,252,680 ÷ $87,600 = 14.3 b. Days' Sales in Receivables = Average Accounts Receivable ÷ Average Daily Sales = $87,600 ÷ ($1,252,680 ÷ 365) = 25.5 days

The following items are reported on a company's balance sheet: Cash $254,000 Marketable securities 83,400 Accounts receivable 269,500 Inventory 198,200 Accounts payable 314,000 Determine the (a) current ratio and (b) quick ratio. Round answers to one decimal place. a. Current ratio b. Quick ratio

a. 2.6 b. 1.9 Current Ratio = Current Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable + Inventory) ÷ Accounts Payable = ($254,000 + $83,400 + $269,500 + $198,200) ÷ $314,000 = 2.6 Quick Ratio = Quick Assets ÷ Current Liabilities = (Cash + Marketable Securities + Accounts Receivable) ÷ Accounts Payable = ($254,000 + $83,400 + $269,500) ÷ $314,000 = 1.9

Which of the following would not be on the statement of cash flows?

cash flows from (used for) contingent activities