SU 16.1/16.2

What was Kale's average total assets for the year?

$1,000,000

Utica Company's net accounts receivable were $250,000 at December 31, Year 3, and $300,000 at December 31, Year 4. Net cash sales for Year 4 were $100,000. The accounts receivable turnover for Year 4 was 5.0. What were Utica's total net sales for Year 4?

$1,475,000

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock when the market price was $10 per share. The option expired in 3 months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

$100

The accounts receivable turnover for Year 4 was 5.0 times. What were Lore's Year 4 net credit sales?

$105,000

At December 31, Boe's book value per common share was

$13.00

Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year. What total dollar amount should be included in Ward's Year 4 consolidated income statement to reflect these expenses?

$176,000

In Ball's Year 4 income statement, what amount should be included as a foreign currency transaction loss?

$27,000

What was Redwood's quick ratio?

0.81 to 1

Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent's debt-to-equity ratio?

1.08

What is Curry's acid-test ratio at December 31, Year 4?

1.5

Which currency rate should Gordon use to convert its income statement to U.S. dollars at year end?

1.55

Drew's quick (acid-test) ratio as of December 31 is

1.7 to 1.

What is the current ratio as of December 31?

1.79

What was Select's percentage return on assets?

10.0%

The market price per share of Thorne's common stock at December 31 was $12. The price-to-earnings ratio at December 31 was

15.0 to 1.

What was Lore's inventory turnover for Year 4?

2.0 times.

What was Baxter's inventory turnover for the year ending December 31?

2.5

TGR's sales and cost of sales for Year 1 were $1,400,000 and $840,000, respectively. What is the accounts receivable turnover in days?

28.7

What is the receivables turnover ratio as of December 31, Year 2?

4.7

What was the average number of days to collect accounts receivable during Year 4?

50.7

On October 1, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in euros 1 month after their receipt at Velec's factory. Title to the goods passed on December 15. The goods were still in transit on December 31. Exchange rates were one dollar to 1.06 euros, 1.04 euros, and 1.05 euros on October 1, December 15, and December 31 respectively. Velec should account for the exchange rate fluctuation for the year as

A gain included in net income.

Which of the following statements regarding foreign exchange gains and losses is true (where the exchange rate is the ratio of units of the functional currency to units of the foreign currency)?

An exchange gain occurs when the exchange rate increases between the date a receivable is recorded and the date of cash receipt.

Which of the following financial instruments is not considered a derivative financial instrument?

Bank certificates of deposit.

A company has a current ratio of 2 to 1. This ratio will decrease if the company

Borrows cash on a 6-month note.

Which of the following risks, if any, are inherent in an interest-rate swap agreement? I. The risk of exchanging a lower interest rate for a higher interest rate II. The risk of nonperformance by the counterparty to the agreement

Both I and II.

A useful tool in financial statement analysis is the common-size financial statement. What does this tool enable the financial analyst to do?

Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or between companies within a given industry without respect to relative size.

On December 15, a U.S. company bought inventory from a European supplier. Payment is required in euros in 30 days. What exchange rate should be used to value the payable for this transaction at year end?

Exchange rate at year end.

Gains from remeasuring a foreign subsidiary's financial statements from the local currency into its functional currency should be reported

In income from continuing operations.

Which of the following is the characteristic of a perfect hedge?

No possibility of future gain or loss.

How should gains or losses from fair value hedges be recognized?

The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.

If all assets and liabilities of a firm's foreign subsidiary are translated into the parent's currency at the current exchange rate (the rate in effect at the date of the balance sheet), the extent of the parent firm's translation gain or loss is based on the subsidiary's

Total assets minus total liabilities.

Which of the following ratios is(are) useful in assessing a company's ability to meet currently maturing or short-term obligations?

Yes, No

Fact Pattern: As part of its risk management strategy, Copper Monkey Mining sells futures contracts to hedge changes in fair value of its inventory. On March 12, the commodity exchange spot price was $0.81/lb., and the futures price for mid-June was $0.83/lb. On that date, Copper Monkey, which has a March 31 fiscal year end, sold 200 futures contracts on the commodity exchange at $0.83/lb. for delivery in June. Each contract was for 25,000 lb. Copper Monkey designated these contracts as a fair value hedge of 5 million lb. of current inventory for which a mid-June sale is expected. The average cost of this inventory was $0.58/lb. The hedge was expected to be highly effective. On March 31, the mid-June commodity exchange futures price was $0.85/lb. In the March 31 statement of financial position, the company should record the futures contracts as a

$100,000 liability.

The subsidiary's operations were an extension of the parent company's operations. What total dollar amount should be included in Union's income statement to reflect the above expenses for the year ended December 31, Year 10?

$45,200

The subsidiary's functional currency is the currency of the country in which it is located. What total amount should be included in Rowan's December 31 consolidated balance sheet for the above accounts?

$475,000

Dividends in arrears on the preferred stock amount to $25,000. If Hoyt were to be liquidated, the preferred shareholders would receive par value plus a premium of $50,000. The book value per share of common stock is

$8.00

In its December 31, Year 4, income statement, what amount should Hunt report as foreign currency transaction gain?

$9,000

What was Cowl's rate of return on assets for Year 4?

6%

During the current year, Rand Co. purchased $960,000 of inventory. The cost of goods sold was $900,000, and the ending inventory at December 31 was $180,000. What was the inventory turnover?

6.0

How many times did Timber's accounts receivable turn over during the year?

8

The times-interest-earned ratio is

8.0 to 1.

In assessing the financial prospects for a firm, financial analysts use various techniques. Which of the following is an example of vertical common-size analysis?

A statement that current advertising expense is 2% of sales.

A sale of goods was denominated in a currency other than the entity's functional currency. The sale resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. The exchange rate between the functional currency and the currency in which the transaction was denominated changed. The effect of the change should be included as a(n)

Component of income whether the change results in a gain or a loss.

When the functional currency of a foreign operation is the U.S. dollar, transaction gains and losses resulting from remeasuring foreign currency financial statements into U.S. dollars should be recognized in

Current earnings in the income statement.

Zenk Co. wrote off obsolete inventory of $100,000 during the year. What was the effect of this write-off on Zenk's ratio analysis?

Decrease in current ratio but not in quick ratio.

Which of the following is included in other comprehensive income?

Foreign currency translation adjustments.

In a comparison of the two most recent years, Neir Co.'s inventory turnover ratio increased substantially, although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Gross profit percentage decreased.

In financial statement analysis, expressing all financial statement items as a percentage of base-year amounts is called

Horizontal common-size analysis.

When remeasuring foreign currency financial statements into the functional currency, which of the following items would be remeasured using historical exchange rates?

Inventories carried at cost.

On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next 2 months. The time value of the option contract is $600. At the end of December, Norta's stock was selling for $43, and the time value of the option is now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann's December 31, year-end financial statements?

Net income will increase by $5,800.

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?

No effect on either

The assets, liabilities, and operations of a foreign entity are to be measured using that entity's functional currency. The functional currency of an entity is defined as the currency

Of the primary economic environment in which the entity operates.

U.S. GAAP require the current rate of exchange to be used for remeasuring certain balance sheet items and the historical rate of exchange for other balance sheet items. An item that should be remeasured using the historical exchange rate is

Prepaid expenses.

Gil Corp. has current assets of $90,000 and current liabilities of $180,000. Which of the following transactions would improve Gil's current ratio?

Purchasing $50,000 of merchandise inventory with a short-term account payable.

Heath Co.'s current ratio is 4:1. Which of the following transactions will normally increase its current ratio?

Selling inventory on account.

A company from the United Kingdom uses British pounds in its normal operations, reports in the European Union in euros, and reports in the United States in U.S. dollars. The company is owned by a private equity firm in Japan. What is the company's functional currency?

The British pound.

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities, and operations using

The subsidiary's functional currency.

Neron Co. has two derivatives related to two different financial instruments, instrument A and instrument B, both of which are debt instruments. The derivative related to instrument A is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. Neron experienced gains in the value of instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?

Yes, No

On September 22, Year 2, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, Year 3, when the spot rate was $.65. The spot rate was $.70 on December 31, Year 2. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, Year 2?

$1,500

On November 1, Year 2, Kir Co. signed a contract to purchase 10,000 British pounds on February 2, Year 3. The relevant exchange rates are as follows: Spot rate Forward rate November 1, Year 2 $1.98 $2.05 December 31, Year 2 2.00 2.06 Kir accounts for the forward contract as a speculative transaction. What amount of gain, if any, should Kir report from this forward contract in its income statement for the year ended December 31, Year 2?

$100

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company's December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain (loss) from the foreign currency transaction when the receivable is collected?

$100

What amount should Don record on June 19 as an account receivable for its sale to Cologne?

$197,600

Fact Pattern: As part of its risk management strategy, Copper Monkey Mining sells futures contracts to hedge changes in fair value of its inventory. On March 12, the commodity exchange spot price was $0.81/lb., and the futures price for mid-June was $0.83/lb. On that date, Copper Monkey, which has a March 31 fiscal year end, sold 200 futures contracts on the commodity exchange at $0.83/lb. for delivery in June. Each contract was for 25,000 lb. Copper Monkey designated these contracts as a fair value hedge of 5 million lb. of current inventory for which a mid-June sale is expected. The average cost of this inventory was $0.58/lb. The hedge was expected to be highly effective. On March 31, the mid-June commodity exchange futures price was $0.85/lb. If, on March 31, the company concluded that the hedge was 100% effective, it should record the hedged copper inventory in the March 31 statement of financial position at

$3,000,000

Barr Co. has total debt of $420,000 and equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock and is negotiating with a bank to borrow additional funds. The bank requires a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow?

$330,000

Harbor has insignificant amounts of convertible securities, stock warrants, and stock options. What is the book value per share of Harbor's common stock?

$49

On October 1, Bordeaux, Inc., a calendar year-end firm, invested in a derivative designed to hedge the risk of changes in fair value of certain assets, currently valued at $1.5 million. The hedge was determined to be highly effective. On December 31, the fair value of the hedged assets decreased by $350,000, and the fair value of the derivative increased by $345,000. Bordeaux should recognize a net effect on earnings for the year of

$5,000

Dividends on preferred stock have been paid through Year 3 but have not been declared for Year 4. At December 31, Year 4, Mage's book value per common share was

$5.50

On September 1, Year 2, Cano & Co., a U.S. corporation, sold merchandise to a foreign firm for 250,000 local currency units (LCUs). Terms of the sale require payment in LCUs on February 1, Year 3. On September 1, Year 2, the spot exchange rate was $0.20 per LCU. On December 31, Year 2, Cano's year-end, the spot rate was $0.19, but the rate increased to $0.22 by February 1, Year 3, when payment was received. How much should Cano report as foreign currency transaction gain or loss in its Year 3 income statement?

$7,500 gain.

Park Co.'s wholly owned subsidiary, Schnell Corp., maintains its accounting records in euros. Because all of Schnell's branch offices are in London, its functional currency is the British pound. Remeasurement of Schnell's Year 4 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign currency transaction gain in its income statement for the year ended December 31, Year 4?

$7,600

Selected information for Clay Corp. for the year ended December 31 follows:Average days' sales in inventories124Average days' sales in accounts receivable48The average number of days in the operating cycle for the year was

172

A derivative financial instrument is best described as

A contract that has its settlement value tied to an underlying notional amount.

How should the foreign currency transaction gain be reported on Toigo's financial statements at December 31?

A gain of $25,000 in the income statement.

What is the foreign currency gain or loss that ABC should record for the year ended December 31, Year 1?

A gain of $30,000.

At December 30, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1. On December 31, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

CR: Increased QR: Decreased

At December 30, Vida Co. had cash of $200,000, a current ratio of 1.5:1, and a quick ratio of .5:1. On December 31, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

CR: Increased QR: Decreased

A company's foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation's capital accounts would be translated to the functional currency of the reporting entity using which of the following rates?

Historical exchange rate.

Grey Co. purchased stock in Cherry Co. Later, Grey purchased a put option on the stock. The strike price is the current market price. What is the most likely reason Grey purchased the put option?

Cherry stock has increased in price, but Grey is concerned that the price might decrease.

Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due 1 month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as a(n)

Component of income from continuing operations.

Which of the following is debited to other comprehensive income (OCI)?

Cumulative foreign currency translation loss.

During the year, Ali's officers exercised share options for 1,000 shares of stock at an option price of $8 per share. What was the effect of exercising the share options?

Debt-to-equity ratio decreased to 12%.

Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign currency transaction gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?

Decrease, Decrease

Garcia Corporation has entered into a binding agreement with Hernandez Company to purchase 400,000 pounds of Colombian coffee at $2.53 per pound for delivery in 90 days. This contract is accounted for as a

Firm commitment.

North Bank is analyzing Belle Corp.'s financial statements for a possible extension of credit. Belle's quick ratio is significantly better than the industry average. Which of the following factors should North consider as a possible limitation of using this ratio when evaluating Belle's creditworthiness?

Fluctuating market prices of short-term investments may adversely affect the ratio.

Which one of the following would be excluded from other comprehensive income (OCI) reported for the current year?

Foreign currency remeasurement gains or losses on monetary assets and liabilities.

How is the average inventory used in the calculation of each of the following?

Not Used, Denominator

Lore would use which of the following to determine the average days' sales in inventory?

Numerator: 365 Denominator: Inventory Turnover

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary's functional currency is the currency

Of the environment in which the subsidiary primarily generates and expends cash.

On December 31, Northpark Co. collected a receivable due from a major customer. Which of the following ratios would be increased by this transaction?

Receivable turnover ratio.

A December 15, Year 3, purchase of goods was denominated in a currency other than the entity's functional currency. The transaction resulted in a payable that was fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 20, Year 4. The exchange rates between the functional currency and the currency in which the transaction was denominated changed between the transaction date and December 31, Year 3, and again between December 31, Year 3, and January 20, Year 4. Both exchange rate changes resulted in gains. The amount of the gain that should be included in the Year 4 financial statements is

The gain from December 31, Year 3, to January 20, Year 4.

The functional currency of Nash, Inc.'s subsidiary is the euro. Nash borrowed euros as a highly effective hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash's translation loss on its investment in the subsidiary exceeded its transaction gain on the borrowing. How should the effects of the loss and gain be reported in Nash's consolidated financial statements?

The translation loss less the transaction gain is reported in other comprehensive income.

On December 1, Year 1, Lombardi Company, a calendar-year-end firm, enters into a highly effective derivative contract designed to hedge the risk of cash flows associated with the forecast future sale of 300,000 bushels of wheat. The anticipated sales date is February 1, Year 2. The notional amount of the derivative contract is 300,000 bushels, the underlying is the price of the same variety and grade of wheat that Lombardi expects to sell, and the settlement date of the derivative is February 1, Year 2. The fair value of the derivative contract on December 31, Year 1, increased by $30,000, an amount equal to the decrease in the fair value of the wheat. The fair value of the derivative contract had increased by an additional $25,000 on February 1, Year 2, also an amount equal to the decrease in the fair value of the wheat. On February 1, the wheat was sold and the derivative contract was settled. The gains attributable to the increase in the fair value of the derivative that should be recognized in Year 1 and Year 2 earnings, respectively, are

Year 1: $0 Year 2: $55,000

A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted-average exchange rate for the current year is an appropriate exchange rate for translating

Yes, Yes