Accounting for Decision Making Exam 4

Which of the following solvency ratios is the best measure of a company's ability to pay interest and maturing principal amounts on its long-term debt?

Debt service coverage ratio

Presented below are selected data from the financial statements of Parade Corp. 2016 2017 Net income $150,000 $123,000 Weighted average number of common shares outstanding 105,000 95,000 Market price per share of common stock at the end of the year $12.00 $10.00 The price/earnings ratio for 2017 is

EPS = $150,000 / 105,000 = $1.43 $12 / $1.43 = 8.39

Which of the following is considered a profitability ratio?

Earnings per share

When using the direct method, how is the issuance of stock for cash shown on the statement of cash flows?

Financing activity

Occasionally, companies engage in important investing and financing activities which do not affect cash. If the amount of the transaction is significant, how should it be disclosed when financial statements are prepared?

In a note to the financial statements or in a supplemental schedule.

When using the indirect method, the gain from selling a long-term investment is recognized in which of the following?

In the operating activity section and the investing activity section of the statement of cash flows.

Which of the following formulas gives the inventory turnover ratio?

Cost of goods sold/Average inventory

Parks Company reported an increase of $370,000 in its accounts receivable during the year 2016. The company's statement of cash flows for 2016 reported $1 million of cash received from customers. What amount of net sales must Parks have recorded in 2016?

$1,370,000

The following items were reported on the balance sheets and income statement for Centerton Inc., a service company: Accounts payable, December 31, 2016 $ 64,000 Accounts payable, December 31, 2017 48,000 Operating expenses—2017 170,000 What amount would be reported in the operating activities section of the statement of cash flows for payments for operating expenses under the direct method?

$186,000

Which of the following ratios is the best measure in analyzing a company's ability to pay interest on long-term debt and to repay the long-term debt over several years?

Debt service coverage ratio

Below are the transactions for the Louisville Company: Proceeds from issuance of bonds payable $635,000 Payment to purchase equipment $275,000 Payment of wages $115,000 Payment of dividends $155,000 Payment to pay off notes payable $195,000 Based on these transactions, what is the net cash flow from financing activities?

$285,000 net cash provided by financing activities.

Presented below are selected data from the financial statements of Provost Corp. 2017 2016 Net income $110,000 $123,000 Cash dividends paid on common stock $42,000 $38,000 Market price per share of common stock at the end of the year $16.00 $13.00 Shares of common stock outstanding 140,000 140,000 The dividend payout ratio for 2017 is

$42,000 / 140,000 = 0.30 $110,000 / 140,000 = 0.79 0.30 / 0.79 = 38.0%

Kelly Corp. reported the following information for 2016 and 2017. Salaries payable, December 31, 2016$ 3,700Salaries payable, December 31, 20171,800Salaries expense—201757,000 How much cash was paid for salaries during 2017?

$58,900

Use the information below for Soho Inc. for 2016 and 2017 to answer the following question. Equipment, December 31, 2016 $65,000 Equipment, December 31, 2017 72,000 Accumulated depreciation, December 31, 2016 39,000 Accumulated depreciation, December 31, 2017 30,000 During 2016, Soho Inc. sold equipment with a cost of $30,000 and accumulated depreciation of $25,000. A gain of $3,000 was recognized on the sale of the equipment This was the only equipment sale during the year. What amount would be reported as the cash proceeds from the sale of equipment?

$8,000

Washington Corp. reported the following information for 2016 and 2017. 2016 2017 Accounts receivable $101,000 $93,000 Prepaid expenses 5,000 6,000 Accounts payable 71,000 76,000 Salaries payable 5,000 4,000 Net income 80,000 Depreciation expense 9,000 Gain on sale of equipment 5,000 If Washington uses the indirect method to prepare the operating activities section of the statement of cash flows, what amount will be reported as net cash inflow from operating activities for 2017?

$80,000 + ($101,000 - 93,000) - ($6,000 - 5,000) + ($76,000 - 71,000) - ($5,000 - 4,000) + $9,000 - 5,000 = $95,000

Auto Industries Company reported the following on its income statement: Income before income taxes$420,000Income tax expense 120,000Net income$300,000 ​ If the income statement also shows interest expense equal to $80,000, what is the company's times interest earned ratio?

6.25 times

Which of the following statements is false?

A statement of retained earnings reports the amount of cash received from operating activities and the amount of cash paid for dividends.

The following items were reported on the balance sheets and income statement for the Flying Mullet Company: Accounts receivable, December 31, 2016 $ 85,000 Accounts receivable, December 31, 2017 98,000 Sales—2017 750,000 How would the change in accounts receivable be reported in the operating activities section of the statement of cash flows under the indirect method?

As a deduction from net income

Which of the following measures can be used to evaluate a company's ability to meet future debt obligations after paying income taxes and interest and making capital expenditures?

Cash flow adequacy ratio

Carson City Saloon purchased a $25,000 truck for catering from its restaurant. It made a down payment of one-fourth of the price. What combination of amounts would affect the income statement and statement of cash flows for the purchase of the truck?

Income Statement: 0 Cash Flow Statement: ($6250)

Which of the following ratios is used to analyze a company's liquidity?

Inventory turnover ratio

When using the direct method, how is the sale of long-term investments for cash reported on the statement of cash flows?

Investing activity

Which of the following statements is false?

Investments in stock are reported as a financing activity on the statement of cash flows

Which of the following financing activities results in a cash inflow?

Issuing bonds

Which balance sheet accounts are most affected by investing activities?

Long-term assets

Which balance sheet accounts are most affected by financing activities?

Long-term liabilities and stockholders' equity

When using the direct method, how is depreciation expense recorded on the statement of cash flows?

Not reported on the statement of cash flows

When using the direct method, how are salaries paid to employees reported on the statement of cash flows?

Operating activity

When using the indirect method, how is an increase in accounts receivable during the year shown on the statement of cash flows?

Operating activity

Which of the following profitability ratios is most useful in indicating the "quality" of a company's earnings?

Price/earnings ratio

Which profitability ratio requires the use of earnings per share in its calculation?

Price/earnings ratio

Presented below is the operating activities section of the statement of cash flows for Feline Friends Corp. for 2016: Operating activities: Cash collected from customers $165,000 Cash payments for merchandise (83,000) Cash payments for operating expenses (58,000) Net cash inflow from operating activities $ 24,000 Which method of preparing the operating activities section has Feline used?

The direct method

Which of the following items would be considered a cash equivalent if it was held at the balance sheet date?

U.S. Treasury bill purchased when there were 90 days until maturity.

Which of the following is an addition to net income when the indirect method is used?

a loss on sale of equipment

Westmoreland CompanyFollowing are selected data from Westmoreland Company's financial statements. 20172016Current liabilities$230,000$160,000Long-term debt120,000320,000Stockholders' equity420,000540,000Cash payments for additions to plant and equipment45,00032,000Net cash flow from operating activities80,00051,000Interest and principal payments12,0008,000Net operating cash flows before interest and taxes68,00043,000Net income90,00072,000Interest expense8,50011,500Income taxes16,00014,500Dividends paid15,00030,000 ​ ​ Refer to the Westmoreland Company data. ​ Westmoreland's debt-to-equity ratio for 2017 is:

an indicator that for every $1 of capital that stockholders provided, creditors provided $0.83.

Which of the following is a measure of the time that it takes to convert current assets into cash?

cash to cash operating cycle

The dollar change and percentage change in the accounts receivable account from 2016 to 2017 is calculated for Allison Corporation. This is an example of

horizontal analysis

Return ratios are measures of the relationship between the

income earned and the investment made in the company by the various groups

Seashell Company is considered "very liquid" for the year ended December 31, 2016. This means that Seashell

is able to pay its current debts using its current assets.

Trend analysis is analysis

of dollar changes and percentage changes over several years.

The operating cycle of a manufacturer is the length of time between the

purchase of raw materials and collection of any outstanding receivables from the sale of the product.

Each of the following transactions would be classified as either an investing or a financing activity except

stock is issued to acquire land.

Most companies

strive for a balance between current assets and current liabilities.

Upon review of Jan's Lakeside Resort statement of cash flows, the following was noted:

using cash from operations and selling long-term assets to pay back debt

Which of the following is a total dollar measure of liquidity?

working capital