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30005 Accounting and Financial Statement Analysis 1

PART A Multiple Choice Questions

Please, place your answers here:

1. On December 15, 2009, the board of directors of Cross Corporation declared a cash dividend,

payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares outstanding.On December 15, 2009, Cross Corporation should

A. not prepare a journal entry because the event had no effect on the corporation's financial

position until 2010.

B. decrease retained earnings $1.6 million and increase expenses $1.6 million.

C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million.

D. decrease cash $1.6 million and decrease retained earnings $1.6 million.

2. The declaration and payment of a cash dividend

A. reduces retained earnings and increases liabilities by the amount of the dividend.

B. reduces retained earnings and increases contributed capital by the same amount.

C. reduces assets and increases liabilities by the amount of the dividend.

D. reduces both assets and retained earnings by the amount of the dividend.

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Practice Exam: TEXT

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3. Which of the following entries would be recorded when a company reissues 1,000 shares oftreasury stock for $40 per share when they were repurchased at a cost of $44 per share andhave a $1 par value?

A. Option AB. Option BC. Option CD. Option D

4. Which of the following journal entries is correct when common stock is initially issued forcash at a price in excess of the stock's stated value?

A.

B.

C.

D.

5. Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which ofthe following is true?A. The investment would be accounted for using the equity method.

B. The investment would be accounted for by consolidation.C. The investment would be accounted for under the market value method.D. The investment would be accounted for under the amortized cost method.

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6. Significant influence over the operating and financial policies of another company may beindicated byA. participation on its board of directors.B. participation in its policy-making process.

C. evidence of material transactions between the two companies.D. all of the above responses.

7. Gilman Company purchased 100,000 of the 250,000 shares of common stock of BurkeCorporation on January 1, 2010, at $40 per share as a long-term investment. The records ofBurke Corporation showed the following on December 31, 2010:

How much should Gilman Company report as investment income from the Burke investmentduring 2010?

A. $230,000B. $218,000C. $12,000D. $30,000

8. On January 1, 2010, Entertainment Company acquired 15% of the outstanding voting stock ofRocker Company as a long-term investment in available-for-sale securities. During 2010,Rocker Company reported net income of $1,500,000 and dividends declared and paid of$250,000. How much income will be reported during 2010 from the Rocker investment?A. $225,000B. $37,500C. $187,500D. $250,000

9. Rice Company, a retailer, has provided the following information pertaining to its recent yearof operation:

Net income, $100,000;Accounts receivable increased $9,000;

Prepaid insurance decreased $3,000;

Depreciation expense was $15,000;

Gain on sale of land, $2,000;

Wages payable decreased $7,000;

Unearned revenue increased $11,000.

How much was Rice's net cash inflow from operating activities?A. $89,000

B. $115,000C. $125,000D. $111,000

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10. KJ Company, a manufacturer, has provided the following information pertaining to its recentyear of operation:

Cash flow from operating activities, $136,000;

Accounts payable increased $11,000;Prepaid assets decreased $8,000;

Depreciation expense was $12,000;

Accounts receivable increased $23,000;

Loss on sale of a depreciable asset was $6,000;

Wages payable decreased $9,000;

Unearned revenue decreased $19,000;

Patent amortization expense was $3,000.

How much was KJ's net income?

A. $185,000B. $135,000C. $147,000D. $131,000

11. Which of the following statements about the statement of cash flows is correct?A. A company with a net loss on the income statement will always have a net cash outflowfrom operating activities.B. A purchase of equipment is classified as a cash inflow from investing activities.C. Cash dividends received on stock investments are classified as cash flows from operatingactivities.

D. Cash dividends paid are classified as cash flows from operating activities.

12. Allen Company's 2010 income statement reported total revenues, $850,000 and total expenses(including $40,000 depreciation) of $720,000. The 2009 balance sheet reported the following:accounts receivablebeginning balance, $50,000 and ending balance, $40,000; accounts

payablebeginning balance, $22,000 and ending balance, $28,000. Therefore, based only onthis information, how much was the 2010 net cash inflow from operating activities?A. $126,000B. $166,000C. $174,000D. $186,000

13. Teague Company's working capital was $40,000 and total current liabilities were 1/4 of thatamount. What was the current ratio?A. 1B. 3C. 5D. 7

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14. Agnes Company reported the following data:

What was the inventory turnover ratio?A. 2.2

B. 1.8C. 2.0D. 3.0

15. Thomas Company had income before interest and taxes of $120,000. Interest expense for theperiod was $17,000 and income taxes amounted to $28,500. The average stockholders' equitywas $680,000. What is Thomas' return on equity (ROE)?A. 17.65%.B. 15.15%.C. 13.46%.D. 10.96%.

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PART B- Exercises

Exercise 1:

On March 1, 2011, Young Company purchased the following stock as long-term investments inavailable-for-sale securities:

Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares)ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares)XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares)

The market prices per share at December 31, end of the accounting period, were as follows:

Prepare the required journal entries at the following dates: March 1, 2011, December 31, 2011 andDecember 31, 2012

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Exercise 2:

Below is the 2011 income statement for the Critters Corporation.

Additional Information:

Accounts receivable increased by $8,000

Merchandise inventory increased by $4,000

Accounts payable increased by $6,000

Prepaid expenses decreased by $2,000

Accrued liabilities decreased by $5,000

Interest payable increased by $1,000

Prepare the operating activities section of the statement of cash flows using the indirect method.

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Exercise 3

On January 1st, 2013, Company LittleComb ltd acquired a 90% stake in Company AllBald S.p.A.,

paying a price of 20,000. The balance sheet of AllBald at the date of the acquisition showed equity of

16,000. At the same date, the fair values of all assets and liabilities of AllBald coincided with their

book values, except for:

ASSET/LIABILITY CARRYING AMOUNT FAIR VALUE

Property 20,000 22,000

Brands 0 12,000

Provisions 3,000 5,000

Property is depreciated at a rate of 10%, while Brands are amortized at a 5% rate. The tax rate is equal

to 50%. Moreover, the following intercompany transactions took place during 2013:

LittleComb sells goods to AllBald for 12,000, making a profit of 4,000 on the sale. At year

end only 20% of this profit has been realized with third parties, with the related receivable isentirely settled at year end;

The parent LittleComb grants funding to AllBaldfor 6,000, which is to be entirely repaid

(and it was) at year end together with interests of 400.

AllBald sells LittleComb a plant with a carrying amount of 10,000. The selling price is

12,000. LittleComb uses a depreciation rate of 10%, the same that AllBold would have used if

it did not sell the plant. The related invoice is paid at year end.

The FV of Non Controlling Interests is equal to 11,000.

AllBald distributes dividends for 2,000 (Please do not consider taxes on Dividends).

Make all the consolidation adjustments needed to build the consolidated financial statements of group

LittleComb-AllBald as of December 31th, 2013.

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Income Statement

Income Statement LittleComb AllBald LC + AB (1) (2) (3) (4) (5) (6) (7) (8) Consolidated

Operating revenues 32,000 18,000 50,000

Operating Expenses 19,200 8,400 27,600

Operating Income 12,800 9,600 22,400

Financial income and expenses 1,200 -2,560 -1,360

Income before taxes 14,000 7,040 25,040

Taxes 5,600 3,440 13,040

Net Income 8,400 3,600 12,000

MI share of income

Balance Sheet

Balance Sheet LittleComb AllBald LC + AB (1) (2) (3) (4) (5) (6) (7) (8) Consolidated

Assets

Non current assets

Property, plant and equipment 30,800 20,000 50,800

Goodwill 0 0 0

Other Intangible Assets 2,000 1,000 3,000

Investments 20,000 0 20,000

Deferred tax assets 0 0 0

Current assets

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Inventories 6,000 13,600 19,600

Receivables 12,000 2,000 14,000

Other assets 5,600 5,000 10,600

Total assets 76,400 41,600 118,000

Balance Sheet LittleComb AllBald LC + AB (1) (2) (3) (4) (5) (6) (7) (8) Consolidated

Equity and liabilities

Owners' equity

Common stock 40,000 12,000 52,000

Retained earnings 2,000 2,000 4,000

Net income 8,400 3,600 12,000

MI share of equity

Common stock and Retained earnings

Net income

Non current liabilities

Provisions 5,000 3,000 8,000

Deferred tax liabilities 400 400

Current liabilities

Trade and financial liabilities 17,600 14,000 31,600

Other liabilities 3,000 7,000 10,000

Total liabilities and equity 76,400 41,600 118,000

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Exercise 4

Using the information provided below and selecting the appropriate ratios from the list, please

compare the two firms in terms of Profitability, Solvency and Liquidity. If you were given the

chance to ask for more information about the firms, what kind of information would you require?

Why?

INCOME STATEMENT (**) ($/millions)

EXPENSES Firm 1 Firm 2 REVENUES Firm 1 Firm 2

Cost of goods sold (*) 26.769 93.438 Merchandise sales 41.866 121.139

Employees compensation 5.400 13.300 Interests on bonds 106

Rent expenses 1.207 1.800

Maintenance expenses 85 179

Returns and allowances onsales 570 1.840

Selling and admin 2.646 3.079

Provisions for uncollect. 1.000

Depreciation and amort. 786 1.000

Interest expenses 1.409 862

Income taxes 912 2.115

Net Income 1.188 3.526

ASSETS Firm 1 Firm 2 LIABILITIES + O.E. Firm 1 Firm 2

Current assets Current liabilities

Cash and equivalents 358 1,447 Short-term borrowings 5,208

Other receivables (short-t) 1,165 976 Current portion of loans 2,561 102

Accounts receivables (net) 23,159 0 Tax payable 554 1,039

Merchandise inventory 5,044 16,497 Accounts payable 6,637 12,754

short-term pre-paid expenses 956 432 Unearned revenues 830 565

Total current assets 30,682 19,352 Total current liabilities 15,790 14,460Long-term assets Long-term liabilities

Land 487 4,691 Long-term debt 13,071 9,674

Buildings 5,420 17,686 Postretirement benefits 3,977 2,747

Furniture and equipment 4,919 7,636 Total long-term liabilities 17,048 12,421

Transportation equipment 498 403 TOTAL LIABILITIES 32,838 26,881

Accumulated depreciation -4,910 -6,810 Common stock 323 224

Long-term pre-paid expenses 1,604 2,426 Capital in excess of par value 1,381 585

Total long-term assets 8,018 26,032 Retained income 2,970 14,168

Net income 1,188 3,526

TOTAL O.E. 5,862 18,503

TOTAL ASSETS 38,700 45,384 TOTAL 38,700 45,384

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RATIOS

Current Ratio: Current Assets / Current Liabilities

Quick Ratio : (Current Assets Inventory) / Current Liabilities

Cash Ratio : Cash and Cash Equivalents/ Current Liabilities

Days Receivables = (Accounts Receivables / Sales )*365

Days Payables = (Accounts Payables / COGS)*365

Days Inventory = (Inventory / COGS)*365

Cash Cycle = Days Receivables + Days Inventory Days Payables

Debt to Assets Ratio = Total Liabilities / Total Assets

Debt to Equity Ratio = Total Liabilities / Equity

Financial Debt to Assets Ratio = (ST financial debt + LT financial debt) / Total Assets

ROE = (Net Income / Equity)

ROA = (Net Income / Total Assets)

ROS = (Net Income / Sales)

Assets Turnover = Sales / Total Assets

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