ADM 1340 Study Guide - Final Guide: Historical Cost, Faithful Representation, Working Capital
ADM 1340 Full Course Notes
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QUESTION 1
Determine the cost of sales for a firm with the following financial ratios and data:
Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times
| a. | $6,000,000 | |
| b. | $3,000,000 | |
| c. | $2,000,000 | |
| d. | $1,000,000 |
8.3 points
QUESTION 2
What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.
| a. | 2.65 | |
| b. | 2.1 | |
| c. | 1.1 | |
| d. | 1.2 |
8.3 points
QUESTION 3
A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?
| a. | $20,000 | |
| b. | $ 5,000 | |
| c. | $10,000 | |
| d. | $15,000 |
8.3 points
QUESTION 4
If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must
| a. | increase its equity multiplier | |
| b. | increase sales and increase assets | |
| c. | decrease its equity multiplier | |
| d. | reduce sales and increase assets |
8.3 points
QUESTION 5
The sales-to-inventory ratio:
| a. | is technically inferior to other commonly used ratios. | |
| b. | is superior to the inventory turnover ratio. | |
| c. | as a determination of financial performance, is good comparison tool. | |
| d. | was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole. |
8.5 points
QUESTION 6
Primary sources of comparative financial data include
| a. | Dun and Bradstreet | |
| b. | Richard Moore, Inc. | |
| c. | Framingham Financial Library | |
| d. | New York Times |
8.3 points
QUESTION 7
____ indicate the ability of the firm to meet its short-term financial obligations
| a. | Leverage ratios | |
| b. | Profitability ratios | |
| c. | Activity ratios | |
| d. | Liquidity ratios |
8.3 points
QUESTION 8
If a firm’s common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:
| a. | on total assets as a percentage of long-term liabilities. | |
| b. | on cost of goods sold as a percentage of sales. | |
| c. | on taxes paid as a percentage of stockholders’ equity. | |
| d. | on expenses as a percentage of current assets. |
8.3 points
QUESTION 9
The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.
| a. | payout | |
| b. | earnings | |
| c. | return on earnings | |
| d. | dividend yield |
8.3 points
QUESTION 10
The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:
| a. | based on the company's accounting information system (AIS) | |
| b. | constructed in conformity with generally accepted accounting principles | |
| c. | developed using management's choice of accounting enhancement techniques | |
| d. | an accurate picture of the company's market position |
8.3 points
QUESTION 11
The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
| a. | liquidity | |
| b. | profitability | |
| c. | size | |
| d. | risk |
8.3 points
QUESTION 12
The type of ratio that indicates the firm’s ability to provide adequate returns in the form of dividends and share price appreciation is:
| a. | Profitability ratios | |
| b. | Asset management ratios | |
| c. | Financial leverage management ratios | |
| d. | Liquidity ratios |
8.5 points
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The following accounts (in no particular order) are for PerfectReb Corporation for the fiscal year ended December 31, 2015. (S/T =Short-Term; L/T = Long-Term)
REQUIRED:
A) Calculate Perfect Reb Corporation’s netincome or net loss for the 2015 fiscal year. You may solve this inany
manner that you wish, but it is highly recommended to prepare amultiple step income statement.
B) Using proper form, prepare Perfect RebCorporation’s balance sheet for 2015.
C) Using the information provided, solve forthe requested ratios and respond to the correspondingquestions.
Common Stock (13,000 shares outstanding) | $52,000 | Sales Discounts | $5,000 | |
Accrued Expenses (Payables) | 20,000 | Income Tax Expense (25% of IBIT) | ??? | |
Miscellaneous Operating Expenses | 50,000 | Cash | 142,000 | |
Accounts Receivable | 20,000 | Interest Expense | 4,000 | |
Buildings | 186,000 | Marketable Securities | 62,000 | |
Retained Earnings | ??? | Notes Payable (due in 5 years) | 12,000 | |
Wages Expense | 60,000 | Rent Expense | 11,000 | |
Inventory | 40,000 | Unearned Revenue | 19,000 | |
Accumulated Depreciation – Buildings | 48,000 | Allowance for Uncollectible Accounts | 15,000 | |
Accounts Payable | 41,000 | Sales | 433,000 | |
Gain on Sale of Equipment | 62,000 | Mortgage Payable ($12,000 S/T) | 144,000 | |
Land | 50,000 | Sales Returns & Allowances | 12,000 | |
Bad Debt Expense | 2,000 | Depreciation Expense | 11,000 | |
L/T Investments | 7,000 | Cost of Goods Sold | 109,000 | |
Notes Receivable ($2,000 S/T) | 13,000 | Interest Revenue | 3,000 |
A) NET INCOME (10 points) – SHOW ALL WORK ANDCALCULATIONS!!!!
B) CLASSIFIED BALANCE SHEET (15 points)
Perfect Reb Corporation Balance Sheet December 31,2015 | ||||||
ASSETS | LIABILITIES | |||||
Current Assets | Current Liabilities | |||||
Total Current Liabilities | ||||||
Total Current Assets | ||||||
Long-Term Assets | Long-Term Liabilities | |||||
Total Long-Term Assets | Total Long Term Liabilities | |||||
Fixed Assets | ||||||
Total Liabilities | ||||||
EQUITY | ||||||
Total Fixed Assets | ||||||
Total Equity | ||||||
TOTAL ASSETS | TOTAL LIABILITIES & EQUITY | |||||
C) RATIOS AND ANALYSIS (15 points):
Use the financial statements and additional information tocalculate the ratios. Round your answers to two decimalplaces. Be sure to label your answer correctly (example,%, times, days, etc.). IF AN ANSWER SHOULD BE EXPRESSED ASA PERCENTAGE, DO NOT LEAVE IT IN DECIMAL FORM!!!! (i.e. 0.5015 =50.15%!!!!)
Previous (December 31, 2014) year end balancesfor:
Accounts receivable, net of allowanceInventory
Stockholders’ Equity
Market price per share for one share of common stock atDec 31, 2015 Dividend per share for one share of common stock forFYE Dec 31, 2015
$2,000 15,000 139,000
$94.50/share $1.25/share
No new shares of common stock were issued during 2015.The company’s credit policy is net 15.
RATIO | CALCULATION | ANSWER |
1) Quick (Acid-Test) Ratio (2points) | ||
2) Dividend Yield (2points) | ||
3) Gross Profit Percentage (2points) | ||
4) Average Days’ Sales Uncollected 2points) | ||
5) Inventory Turnover (2points) | ||
6) Price-Earnings Ratio (2points) |
7) Using the liquidity ratios (and generalaccepted norms for the current ratio and quick/acid-test ratio),comment on the company’s financial position. (3points)
Oak Industries, Inc is a manufacturer of radio and cable TVequipment. It also operates subscription TV systems. At one timeOak had a military contract, the loss of which was not disclosed inthe financial statements. The government, subject to a customs dutyaudit, is claiming $4 million due it. Oak officials have had atarget earnings per share amount of $.25 per share.
The financial statements, without footnotes, are included in thefollowing two pages. Using the financial information available andthe information above, answer the following questions:
1) Prepare a vertical analysis for both the balance sheet andthe statement of income
2) Prepare a horizontal analysis for both the balance sheet andthe statement of income
3) What ratios might be of some use in analyzing these financialstatements?
4) Using the ratios identified in #3 above, what trends appearto be out of line?
5) Other than failure to disclose the loss of the governmentcontract, can you identify any potential fraudulent, misleading oromitted information from your analysis in number 1-4 above?
6) If your answer to #5 is yes, can you quantify the amount ofthe potential misstatement?
Oak Industries, Inc
Unaudited consolidated Financial Statements
(000’s Omitted)
Balance Sheet
Balance Sheet | 12/31/X1 | 12/31/X2 |
ASSETS | ||
Cash | $10,304 | $12,683 |
Marketable Securities | 66,676 | 33,235 |
Accounts Receivable | 104,953 | 131,017 |
Inventories | 106,569 | 127,305 |
Prepaid Income Taxes | 10,762 | 24,461 |
Total Current Assets | 299,264 | 328,701 |
Fixed Assets | 248,991 | 277,493 |
Accumulated Depreciation | (70,640) | (99,789) |
Notes Receivable | 10,983 | 13,368 |
Intangible Assets (net) | 78,918 | 57,946 |
Investments | 27,323 | 34,164 |
Other Assets | 14,480 | 24,297 |
310,055 | 307,479 | |
Total Assets Liabilities & equity | $609,319 | $636,180 |
Notes Payable | $70,758 | $8,846 |
Accounts Payable | 35,053 | 31,430 |
Accrued Liabilities | 47,765 | 54,857 |
Current Portion LTD | 8,889 | 5,391 |
Subscriber Deposits | 17,502 | 15,378 |
Total Current Liabilities | 179,967 | 115,902 |
Long-Term Debt | 141,744 | 238,417 |
Other L/T Liabilities | 25,325 | 27,746 |
167,069 | 266,163 | |
Common Stock | 16.363 | 16,402 |
Preferred Stock | 72 | 54 |
Capital Surplus | 158,890 | 159,281 |
Retained Earnings | 89,761 | 89,932 |
Currency Adjustments | (2,757) | (11,521) |
Treasury Stock | (46) | (33) |
Total Liabilities & Equity | $609,319 | $636,180 |
Statement of Income
Statement of Income | 12/31/X1 | 12/31/X2 |
Net Sales | $507,119 | $545,720 |
Cost of Goods Sold | 338,682 | 410,209 |
Gross Margin | 168,437 | 135,511 |
General Expenses | 107,707 | 125,982 |
Operation Income | 60,730 | 9,529 |
Other Income | 15,944 | 10,659 |
Interest Expense | 25,430 | 30,170 |
Minority Interests | 8,986 | 3,075 |
Income Taxes (Benefit) | 11,908 | (17,160) |
(30,380) | (5,426) | |
Net Income | $30,350 | $4,103 |
Earnings Per Share | $2.01 | $0.25 |
