会计AFM101_midterm_F2005

UNIVERSITY OF WATERLOO

School of Accountancy

AFM 101

Professor Duane Kennedy

Mid-Term Examination

Fall 2005

Date and Time: October 28, 2005, 4:45 – 6:15pm

Pages: 17, including cover

Name: ________________________________ Student Number: __________ Tutorial Number and Time: ___________________

Instructions:

1) Cordless calculators may be used. The calculator must be standalone with no

other communication or data storage features.

2) Answers for the multiple-choice questions must be recorded on the UW answer

card. All other questions must be answered in the space provided on the

examination paper. Answers written outside of the provided space will not be

graded. You must submit both this examination paper and the UW answer card.

3) Show details of all calculations.

4) The final page of the examination contains a list of ratios.

5) Please verify that this examination paper has the appropriate number of pages.

Question Maximum Marks Mark Awarded

1 12

2 8

3 12

4 12

5 10

6 6

7 30

Total 90

Question 1 (12 marks)

Sproule Incorporated reported the following December 31 amounts in its financial statements (in millions):

2005 2004 2003

Sales revenue $190.0 $175.0 $165.0

Gross profit 76.0 66.5 58.0

Net income 19.0 15.7 13.3

Total Assets 80.0 75.0 70.0

Total shareholders' equity 50.0 47.0 45.0 Required:

A)Compute the net profit margin for 2005

B)Compute the asset turnover ratio for 2005

C)Compute the financial leverage ratio for 2005

D)Compute the return on equity ratio for 2004 and 2005

E)Comment on the trend in the return on equity ratio

Question 2 (8 marks)

The following transactions were completed during 20A by Eagle Company. The annual accounting period ends December 31.

Required:

Provide the adjusting entries required at December 31, 20A.

A) On December 31, 20A, Eagle Company owed employees $1,750 for wages that were earned by them during December and were not recorded.

B) During 20A, Eagle Company purchased office supplies that cost $500 which were placed in the supplies room for use as needed. The purchase was recorded as follows: Office supplies inventory $500

Cash $500

At the beginning of 20A, the inventory of unused office supplies was $75. At the end of 20A, a count showed unused office supplies in the supply room amounting to $100.

C) On December 1, 20A, Eagle Company rented some office space to another party. Eagle collected $900 rent for the period December 1, 20A, to February 28, 20B. The rent collected was recorded as follows:

December 1, 20A: Cash $900

Unearned rent $900

D) On June 1, 20A, Eagle Company borrowed $2,000 cash on a one-year, 10% interest-bearing, note payable. The interest is payable on the due date, May 31, 20B. The note was recorded as follows:

June 1, 20A: Cash $2,000

Notes payable $2,000

Question 3 (12 Marks)

The following information relates to activities for Garth Inc. for 20B.

(a)Net income $10,000 which includes amortization expense of $5,000

(b)Inventory decrease, $1,000;

(c)Accounts payable increase $3,500.

(d)Issued capital stock for $4,000 of equipment.

(e)Sold equipment for $8,000, book value $5,000.

(f)Paid cash dividend, $3,000.

(g)Paid long-term debt principal, $8,000.

(h)Purchased equipment for $12,000 in exchange for a note payable all of which was

due to be paid at the end of two years.

(i)The cash balance on January 1, 20B, (start of the fiscal year) was $10,000. Required:

Prepare the statement of cash flows for Garth Inc. for 20B using the indirect method. Please use the table on the following page to complete this question. Be sure to prepare a schedule for any non-cash items for disclosure, if appropriate.

Garth Inc.

Statement of Cash Flows

____________________

Operating Activities:

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________

Net cash flow from operating activities __________

Investing Activities:

_________________________ __________

_________________________ __________

_________________________ __________

Net cash flow from investing activities __________

Financing Activities

_________________________ __________

_________________________ __________

_________________________ __________

Net cash flow from financing activities __________ _________________________ __________ _________________________ __________ Cash balance on December 31, 20B __________

Non-cash Investing and Financing Activities

_________________________

_________________________

_________________________

Kansas Company has hired you to reconcile its bank statement and cash account. For June, the Cash account showed the following:

Cash

Date Explanation Debits Credits Balance June 1 Balance $9,500 June 1-30 Deposits $26,000 35,500 June 1-30 Cheques $23,500 12,000 June 30 Balance 12,000 The June bank statement, just received, showed the following:

June 1, balance $9,500

June deposits 22,000

June 6, Note collected for depositor, (principal $500) 540

Cheques cleared in June (18,700)

Bank service charge (25)

NSF Cheque (cheque returned for non-sufficient funds) (200)

June 30, balance $13,115

There were no outstanding cheques or deposits in transit at May 31.

Required:

Prepare the reconciliation using the format below:

Kansas Company

Bank Reconciliation

June 30, 20A

Company’s Books Bank Statement

Ending cash balance per books Ending cash balance per bank statement Additions Additions

Deductions Deductions

Ending correct cash balance Ending correct cash balance

The following data were taken from the records of Milius Corporation on December 31, 20B:

Sales of merchandise for cash $110,000

Sales of merchandise for credit 252,000

Sales returns and allowances 12,000

Selling expense 70,000

Cost of goods sold 224,000

Administrative expense 32,000

Items not included in above amounts:

Estimated bad debt loss, 1% of credit sales.

Average income tax rate, 25%.

Number of shares of common stock outstanding, 9,000

Required:

Based on the above data, prepare a multiple-step income statement using the table below.

Milius Corporation

Income Statement

_________________________

Revenue __________

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________ Expenses

_________________________ __________

_________________________ __________

_________________________ __________

_________________________ __________ __________

Income before taxes __________

_________________________ __________

Net Income __________

Earnings per share

The answers to the following questions must appear in the space provided.

a)Briefly define the term “pro forma earnings.”

b)Briefly define the term “channel stuffing.”

c)As an investor, why would you be concerned about channel stuffing?

Question 7 (30 marks)

Choose the correct response from the answers provided. There is no mark penalty for incorrect responses. Mark the correct responses by completing the University of Waterloo answer card, using a black lead HB pencil only. Write your name and student number on

the answer card and mark your student number in the appropriate ovals. You do not

need to complete the section number and card number. Answers recorded on the

following pages will not be marked.

1. If Papa John's reports an asset turnover ratio of

2.34 for 1998 and their competitor Pizza

Hut reports 3.79 for their 1998 ratio, it means that Papa John's

A) is better able to pay their current obligations with their current assets

B) has been more effective in managing the use and level of its assets

C) has been less effective in managing the use and level of its assets

D) is less able to pay off their current obligations with their current assets

2. During 20A, Thomas Company recorded bad debt expense of $15,000 and wrote off an

uncollectible account receivable amounting to $5,000. Assuming a January 1, 20A,

balance in the allowance for doubtful accounts of $10,000, the December 31, 20A,

balance in the allowance account would be

A) $25,000.

B) $20,000.

C) $15,000.

D) $ 5,000.

E) None of these amounts is correct.

3. The article "Cash-Rich Firms Feel Pressure to Spend" discusses the issue of cash

accumulation in some companies. Which of the following statements is correct?

A) Managers try to develop a large cash balance in order to make it easier for buyout

specialists to take over the company.

B) Large cash balances enable managers to push up the company's stock price by paying

larger cash dividends.

C) Large cash balances are not desirable because of the low rate of return on cash.

D) Both B and C are correct.

E) A, B, and C are correct.

4. Lori Company sold an operational asset, a machine, for cash. It originally cost $20,000.

The accumulated amortization at the date of disposal was $15,000. A gain on the

disposal of $2,000 was reported. Therefore, the cash inflow from this transactions was

A) $7,000.

B) $3,000.

C) $4,000.

D) $5,000.

E) None of the amounts is correct.

5. Assume a company's January 1, 20A, financial position was: Assets, $40,000 and

Liabilities, $15,000. During January 20A, the company completed the following

transactions: (a) paid on a note payable, $4,000 (no interest); (b) collected accounts receivable, $4,000; (c) paid accounts payable, $2,000; and (d) purchased a truck, $1,000 cash, and $8,000 notes payable. The company's January 31, 20A, financial position is Assets Liabilities Stockholders'Equity

A) $42,000 $17,000 $25,000

B) $44,000 $17,000 $27,000

C) $43,000 $18,000 $25,000

D) $42,000 $ 9,000 $33,000

6. Smith Company purchased a piece of land with a new building on January 1, 20A. The

land was valued at $80,000 and the building was valued at $120,000 with a 40 year life and a zero salvage (residual) value. How would the land and building appear in the plant, property and equipment section of the December 31, 20A, balance sheet?

A) Land at 80,000 less accumulated amortization of 2,000; Building at 120,000 less

accumulated deprecation of 3,000.

B) Land at 80,000; Building at 120,000.

C) Land at 78,000; Building at 120,000.

D) Land at 80,000; Building at 120,000 less accumulated amortization of 3,000.

E) None of the rows is correct.

7. The comparability principle means that

A) users can compare financial data across businesses.

B) accounting procedures should be applied the same from year to year.

C) accounting data should be supported by documents when possible.

D) accounting data should be based on objective data and transactions.

E) None of the statements is correct.

8. Under the installment method, revenue is recognized when the customer

A) orders the merchandise.

B) receives the merchandise.

C) receives the bill.

D) makes a cash payment.

9. Jackson Company uses the allowance method to account for bad debts. During 20D, a

customer became bankrupt and a receivable of $5,000 was deemed uncollectible. The entry to record the uncollectible amount is:

A) Allowance for doubtful accounts 5,000

Accounts receivable 5,000

B) Bad debt expense 5,000

Allowance for doubtful accounts 5,000

C) Allowance for doubtful accounts 5,000

Bad debt expense 5,000

D) Loss on receivables 5,000

Accounts receivables 5,000

E) Bad debt expense 5,000

Accounts receivable 5,000

10. The accounts payable account has a beginning balance of $1,000 and we purchased

$3,000 of inventory on credit during the month. The ending balance was $800. How much did we pay our creditors during the month?

A) $2,800

B) $3,000

C) $3,200

D) $4,800

E) None of the amounts is correct.

11. In 2001, G CO. reported product sales of $717.8 million and accounts receivable-trade

of $79.4 million. In 2000 product sales were $584.9 million and accounts receivable-trade were $71.4 million. Their receivables turnover ratio for 2001 is

A) 9.04

B) 8.19

C) 9.52

D) 8.64

E) None of the amounts is correct.

12. On March 1, 20A, the premium on a two-year insurance policy on equipment was paid

amounting to $1,800. At the end of 20A (end of the accounting period), the financial statements for 20A, would report

A) Insurance expense, $900; Prepaid insurance $900.

B) Insurance expense, $1,800; Prepaid insurance $0.

C) Insurance expense, $0; Prepaid insurance $1,800.

D) Insurance expense, $750; Prepaid insurance $1,050.

E) None of the rows is correct.

13. G Co., which is a biotechnology firm, reported the following revenues on their 2001

income statement; Product sales $582.2 million, Royalties $214.7 million, Contract

revenue $107.0 million and Interest income $64.1 million. Their cost of sales were

reported as $104.5 million. What was their gross profit percentage?

A) 88.5%

B) 82.1%

C) 89.2%

D) 84.8%

E) None of these percentages is correct.

14. In 2001, C Co. reported net sales revenues of $18.8 billion and cost of goods sold of

$5.6 billion while P Co. reported revenues of $22.3 billion and cost of goods sold of $9.3 billion. Which of the following statements is correct?

A) While P Co. generated more revenue than C Co., they generated a lower gross profit

percentage

B) C Co. generated a lower gross profit percentage because their sales revenue was lower

C) P Co. did a better job of controlling product costs as a percentage of sales than did C Co.

as evidenced by their $13.0 billion gross profit amount

D) None of these statements is correct.

15. The financial statements for Russell Company show the following:

Cost of Goods sold $121,000

Beginning Balance Ending Balance

Merchandise inventory$25,000$26,000

Accounts Receivable 35,000 33,000

Accounts Payable 18,000 21,000

Cash paid for merchandise is

A) $124,000.

B) $121,000.

C) $119,000.

D) $117,000.

E) None of the amounts is correct.

16. On January 1, 20A, Virginia Company had $22,000 of Retained Earnings. During 20A

Virginia earned net income of $40,000 and declared and paid dividends of $20,000. In addition, the company received cash of $15,000 as an additional investment by its

owners. Therefore, the ending balance in Retained Earnings at December 31, 20A

would be

A) $67,000.

B) $42,000.

C) $57,000.

D) $32,000.

E) None of the amounts is correct.

17. The books of Tweed Company provided the following information:

Beginning balances:

Accounts receivable $ 30,000

Allowances for doubtful accounts (a credit) 2,000

Transactions during the year:

Sales revenue (of which 1/3 were on credit) 1,800,000

Collections on accounts receivable 590,000

Accounts written off as uncollectible 2,500

Past collection experience has indicated that 1% of credit sales normally is not collected.

Therefore, an adjusting entry for bad debt expense should be made in the amount of

A) $6,500.

B) $2,500.

C) $6,000.

D) $ 500.

E) None of the amounts is correct.

18. The qualitative characteristic that says accounting information can influence users'

decisions is

A) comparability.

B) materiality.

C) reliability.

D) relevance.

E) None of these is correct.

19. Accrual accounting requires that the loss resulting from the failure of credit customers

to pay their bills should

A) not be recorded until cash is collected from the customer in settlement of the account

because that is the only sure event.

B) be estimated in the period in which sales are made but should not be recorded until the

customer defaults because of the matching principle.

C) be estimated and recorded in the period in which sales are made so that periodic

expenses are matched with periodic revenues.

D) be recognized in the period in which the account receivable proves to be uncollectible

because that is the only date when the loss will really be known.

E) None of these responses is correct.

20. ABC Toys received an order from a customer on March 1. The toys were shipped on

March 18. The customer sent a cheque for full payment on April 10. ABC received the cheque on April 12 and deposited it in the bank account. ABC should record sales

revenue related to this series of transactions on

A) March 1.

B) March 18.

C) April 10.

D) April 12.

E) None of the dates is correct.

21. The direct method of preparing a statement of cash flows

A) gives the user a sense of the magnitude of gross dollars flowing in and out of the

company.

B) has the same cash flows from investing and financing activities as the indirect method.

C) has the same net cash inflow (outflow) from operating activities as the indirect method.

D) reports the same net increase or decrease in cash as the indirect method.

E) All of the responses are true.

22. Credit terms of 2/10, n/30 indicate that a

A) two percent discount for early payment is available if the invoice is paid before the tenth

day of the month following the month the sale.

B) two percent discount for early payment is available within ten days of the invoice date.

C) ten percent discount for early payment is available if the invoice is paid within two days

of the date of the invoice.

D) two percent discount for early payment is available if the invoice is paid after the tenth

day, but before the thirtieth day of the invoice date.

E) None of these responses is correct.

23. Which of the following statements about the capital acquisitions ratio is true?

A) A high ratio indicates less need for outside financing of property, plant and equipment.

B) The ratio is computed by dividing cash flow from operations by the average property,

plant and equipment, net from the balance sheet.

C) A low ratio may indicate a failure to update property, plant and equipment which can

limit a company's ability to compete in the future.

D) All the above are true.

24. The article "Playing by the Rules" discusses the consequences of earnings management.

Which of the following statements is correct?

A) Managers have an incentive to manipulate earnings if their compensation contracts are

based on earnings numbers.

B) Manipulation of earnings is not effective because the manipulations will reverse in

future years.

C) A major result of earnings management is the loss of credibility of accounting

information.

D) A, B, and C are all correct.

E) A and C are correct.

25. A company purchased goods on credit with credit terms of 3/15, n/45. Although the

company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate

associated with the sales discount. This annual rate is approximately

A) 56%.

B) 38%.

C) 25%.

D) 18%.

E) None of the percentages is correct.

26. In 2002, C Co disclosed cash paid for property, plant and equipment of $1,069 million

and cash flow from operations of $3,883 million. Their average property, plant and

equipment from the comparative balance sheet was $3,968 million. Compute C Co's capital acquisitions ratio for 2002.

A) 3.63

B) 0.98

C) 3.71

D) 0.77

E) None of these ratios is correct.

27. Brooks Company sold equipment for $100,000, purchased a building for $80,000, sold

long-term investments for $20,000 and repaid a note payable for $25,000 plus $1,500 of interest. The net cash flow from investing activities was (parentheses indicate an

outflow):

A) $15,000.

B) $40,000.

C) ($45,000).

D) $13,500.

E) None of the amounts is correct.

28. On January 1, 20A, Barnett Corporation purchased a delivery truck that cost $40,000.

Cash of $25,000 was paid, and the balance of $15,000 was payable on January 31, 20A.

The truck has an estimated useful life of four years and no residual value. The company uses the straight-line method for amortizing all trucks. Considering only these facts,

amortization expense (on the truck) for 20A, would be

A) $40,000.

B) $25,000.

C) $30,000.

D) $10,000.

E) None of the amounts is correct.

29. In 2001, A Co. reported product sales revenue of $2,514.4 million and accounts

receivable of $319.9 million for 2001 and $269.0 million in 2000. What was the cash

flow generated by sales?

A) $2,514.4 million

B) $2,565.3 million

C) $2,463.5 million

D) $2,194.5 million

E) None of the amounts is correct.

30. Assume that Laiken Incorporated recorded the following adjusting entry at year-end:

Insurance expense $800

Prepaid insurance $800

If the beginning balance in prepaid insurance was $700 and $1,500 was paid for an

insurance premium during the year, the ending balance in the prepaid insurance account (after the above adjusting entry) would be

A) $1,400 debit.

B) $2,200 debit.

C) $100 debit.

D) $1,500 debit.

E) None of the responses is correct.

Ratios

Price- Earnings Ratio Market Price

Net Income

Financial Leverage Ratio ___Average Total Assets___

Average Shareholders’ Equity

Total Asset Turnover Ratio _____Net Sales_____

Average Total Assets

Earnings per Share __Net Income Available to Common Shareholders__

Weighted-Average Number of Common Shares

Outstanding during the Period

Net Profit Margin _Net Income_

Net Sales

Quality of Income Ratio __Cash Flow from Operating Activities__

Net Income

Capital Acquisition Ratio ____Cash Flow from Operating Activities____

Cash Paid for Property, Plant, and Equipment Return on Equity ________Net Income________

Average Shareholders’ Equity

Gross Profit Percentage Gross Profit

Net Sales

Accounts Receivable Turnover Ratio __________Net Sales__________

Average Net Accounts Receivables Average Age of Receivables Average Net Accounts Receivables

Average Sales per Day