The best definition of assets is the(D) a. cash owned by the company. b. collections of resources belonging to the company and the claims on these resources. c. Owners’ investment in the business. d. resources belonging to a company have future benefit to the company. 2. Liabilities(B) a. are future economic benefits. b. are debts and obligations. c. ossess service potential. d. are things of value owned by a business. 3. Notes to the financial statements (B) a. are optional. b. help clarify information presented in the financial statements. c. are generally brief and few in number. d. need not be read in detail if an unqualified opinion accompanies the financial statements. 4. The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n)(A) a. account payable. b. account receivable. c. revenue. d. expense. 5. An income statement(D) a. summarizes the changes in retained earnings for a specific period of time. . reports the changes in assets, liabilities, and stockholders’ equity over a period of time. c. reports the assets, liabilities, and stockholders’ equity at a specific date. d. presents the revenues and expenses for a specific period of time. 6. Which of the following financial statements is concerned with the company at a point in time? (A) a. Balance sheet. b. Income statement. c. Retained Earnings statement. d. Statement of cash flows. 7. Payments to stockholders are called(c) a. expenses. b. liabilities. c. dividends. d. distributions. 8. The discontinued operations section of the income statement refers to(D) a. iscontinuance of a product line. b. the income or loss on products that have been completed and sold. c. obsolete equipment and discontinued inventory items. d. the disposal of a significant segment of a business. Use the following information for questions 9-10. The following amounts were taken from the financial statements of Alien Company: 2007 2006 Current liabilities$280,000$220,000 Long-term liabilities800,000600,000 Interest Expense100,00050,000 Income tax expense120,00058,000 Net income300,000170,000 Net cash provided by operating activity480,000270,000 9. The times interest earned ratio for 2007 is(D) . 3. 0 times. b. 4. 8 times. c. 4. 0 times. d. 5. 2 times. 10. The cash debt coverage ratio for 2007 is(A) a. 50. 5%. b. 44. 4%. c. 31. 6%. d. 62. 5%. Part II – 60pts Problems 11. Selected data taken from the 2006 financial statements of trading card company Bottoms Company, Inc. are as follows (in millions). 10pts Net sales$295. 9 Current liabilities, February 28, 200539. 5 Current liabilities, February 28, 200647. 5 Net cash provided by operating activities23. 0 Total liabilities, February 28, 200564. 2 Total liabilities, February 28, 200671. 2 Capital expenditures2. 6 Cash dividends6. 5 Instructions
Compute these ratios at February 28, 2006: (a)Current cash debt coverage ratio (b)Cash debt coverage ratio (c)Free cash flow Provide a brief interpretation of your results. (A) Current cash debt coverage ratio: Net cash by operating activities Average current liabilities 23. 0= 23. 0= . 528 39. 5+47. 5/2 43. 5 The Bottoms company, Inc is able to pay more than 52% of their current liabilities with the cash generated due to operating activities. (B) Cash debt coverage ratio: Net cash by operating activities Average total liabilities 23. 0 = 23. 0 = . 339 64. 2+71. 2/2 67. 7 The Bottoms Company Inc. s able to cover 34% of their total liabilities due to cash from operating activities. C) Free cash flow: Cash from operating activities- capital expenditures- cash dividends $ 23. 0- $2. 6-$ 6. 5= $13. 9 The Bottoms Company has generated enough cash flow from the operating activities to pay dividends and remain productive. This positive cash flow could be used to reduce debt, expand operations or pay additional dividends. 12. The comparative balance sheet of Stuart Company appears below: 20pt STUART COMPANY Comparative Balance Sheet December 31, Assets 20072006 Current assets $ 340$280 Plant assets 675 520
Total assets $1,015$800 Liabilities and stockholders’ equity Current liabilities $ 180$120 Long-term debt 250160 Common stock 325320 Retained earnings 260 200 Total liabilities and stockholders’ equity $1,015$800 Instructions (a)Using horizontal analysis, show the percentage change for each balance sheet item using 2006 as a base year. (b)Using vertical analysis, prepare a common size comparative balance sheet. Excel worksheet attached 13. The Brawn Company had a $400 credit balance in Allowance for Doubtful Accounts at December 31, 2007, before the current year’s provision for uncollectible accounts.
An aging of the accounts receivable revealed the following: 20pts Estimated Percentage Uncollectible Current Accounts$140,0001% 1–30 days past due15,0003% 31–60 days past due12,0006% 61–90 days past due5,00012% Over 90 days past due 7,00030% Total Accounts Receivable$179,000 Instructions a) Prepare the Estimated Uncollectible schedule for each percentage. b) Prepare the adjusting entry on December 31, 2007, to recognize bad debts expense. Excel Worksheet attached 14. What is an extraordinary item on the income statement? What is an extraordinary loss? Provide some examples of extraordinary loss.
How does it affect the financial statement? 10pts An extraordinary item on the income statement would be any gains or losses that are in a company’s financial statement and they need to meet two criteria: infrequent and unusual in nature. The extraordinary event is something that is unforeseen and atypical events. An extraordinary loss could be a snowstorm in Hawaii which created a loss to pineapple crops. This type of loss would be written down as a one-time loss because of an extraordinary item. Another example would be a company selling its factory or factories for less than market value.
This would prove to be a non-recurring event. Extraordinary items have their own place on the income statement which will allow isolation of irregular components of net income from ordinary and recurring operations associated with the business. Future operations of the business can be determined in a more accurate manner isolating certain current performances and will prevent misrepresentation of a company’s regular earnings. Each component on the income statement will have a tax effect. Income from continuing operations, discontinued operations and extraordinary items will be reported net of their income tax effects.
The tax effect can be a tax expense or tax benefit; extraordinary gains will add to the company expense however extraordinary loss will be a reduction due to reducing taxable income thus reducing income taxes. A loss will cause a reduction in taxes; pretax income can include a significant extraordinary loss rather than gain so the loss will be reported as net of the associated tax savings. Part III – 20pts 15. Your friend, Mark, has opened a movie theater. Mark states that he does not have time to develop and implement a system of internal controls. 10pts a.
Provide Mark with the objectives of a system of internal control. The systems of internal controls are implemented as techniques for employees and managers to ensure specific control objectives are met on a continuous basis. These controls are implemented to protect all valuable information and products associated with the company’s economic performance and continued sustainability. The most common objectives associated with internal controls will include reliability of information, propriety of transactions, security, efficiency and compliance with regulations.
The Principles of internal controls includes ssegregation of duty, establishment of responsibility, physical, mechanical and electronic controls, independent internal verifications, duty rotations for employees and bonding employees who are handling cash. Segregation of duty would include the responsibility of a record of an asset should be separate from the physical asset. Sales activities of an asset would be divided into different sections such as making the sell, shipping the goods and billing. Establishment of responsibility would include authorizations and approvals to specific individuals.
Physical, mechanical and electronic controls are in place to safeguard assets; vaults, safes, safety deposit boxes, locked warehouses, storage cabinets, alarms, computer pass codes, finger prints and eye scanners, time clocks for record keeping. b. Explain to Mark why he should develop a system of internal control. The development of incorporating a system of internal controls can be crucial to the organization governance system and its ability to manage risk. It is fundamental in supporting all achievements of an organization’s objectives.
Internal controls are an important aspect of protecting stakeholder value and risk management. Internal controls are effective in enabling an organization to offset any threats and capitalize on opportunities. Mark is able to save time and money while promoting creation and preservation towards competitive advantages. 16. A large stock dividend and stock split can frequently have the same effect on the Market price of a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a corporation’s stock. 0pts A stock dividend and stock split do have the same effect on the market price of a company’s stock however the accounting techniques are different. Additional shares of stock provided to current shareholders’ of an organization are considered to be stock dividend. The stock dividend has no effect on the assets or liabilities of the company. Each shareholder will receive the same percentage increase of shares and will cause no change associated with the shareholders percentage of ownership in the company.
There is a decline in proportion to an increase in the number of shares distributed in a stock dividend; market price per share will decline. A proportionate increase in the number of outstanding shares will indicate a stock split. A stock split does not affect the issuing company’s liabilities, earnings, equity or assets. Stock dividends that are greater than 25 percent will be recorded as a stock split. A two for one stock split is known as 100 percent stock dividend; a split stock decision may be due to the stock being too high in price. A lower price indicates a more marketable stock.