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Business Administration
BUS 251
Steve Gibson

Name: __________________________ Date: _____________ 1. Nisson Inc distributes electronic components and has just completed their first year of operation. Management is looking forward to finding out what the profit for the year was because they get paid a bonus based on net income. The accountant has provided them with the following information concerning their inventory for the year: Sales: 8,000 units Total revenue: $172,000 Purchases: 10,000 units Total cost: $190,000 Ending inventory under moving $ 36,667 average: Ending inventory under FIFO: $ 36,000 Due to over-supply in the industry at year-end the price for the product had fallen to $20 and the company estimates that the costs to ship and sell the product are $2.50 per unit. Required: a. Calculate the gross margin if Nisson decides to use the moving average cost flow assumption. b. Calculate the gross margin if Nisson decides to use the FIFO cost flow assumption. c. Based on your answers to (a) and (b) which cost flow assumption would management prefer? Why? d. Have prices for the inventory been rising or falling during the year? e. What is the market value of the inventory for applying the lower of cost and market rule? f. What value should Nisson report on its financial statements for cost of goods sold and ending inventory? Support your answer. Assume they use the direct method when applying LCM. Page 1 2. Jasper Inc. uses a perpetual inventory system and had the following activity for a single inventory item: Units Unit Cost Total Cost August 1, inventory 500 $2.50 $1,250 Purchases: August 5 250 3.50 875 August 10 175 4.50 787.50 August 15 100 5.50 550 Sales: August 11 550 August 19 375 Required: Using the perpetual system, determine the ending inventory and cost of goods sold under: a. FIFO b. Moving average (round unit cost to nearest cent) 3. Armada Limited sold a piece of equipment August 1, 2011 for proceeds of $22,000. The equipment had an original value of $60,000 and was purchased on January 1, 2008. It was estimated to have a residual value of $3,000 and 5 year useful life. Armada uses the straight line method. Armada has a December 31 year end. Required: Journalize all entries required to update amortization and record the sale of the asset in 2011. 4. Phil's Pharmacy Inc. has decided to add a delivery service to its business. In 2011, the company purchased a car to use to deliver customer orders. The purchase price of the car was $42,000, including sales taxes of $5,800. The car was painted with the store logo for $1,000 and an additional $750 was spent on the annual license fee. During the year they spent $3,000 on gas and $1,000 on maintenance costs. They expect to drive the car 200,000 kilometres and have a residual value of $5,000. In 2011, they drove 27,500 km. Required: a. Calculate the cost of the asset to Phil's. Provide brief support for all items included in the cost and the reason any costs are not included. b. Record the amortization expense for 2011 using the units of activity method. Page 2 5. Fabio's Furniture purchased a laser guided mitre saw on September 1, 2009 at a cost of $20,000. Amortization for 2009 and 2010 was based on an estimated 8-year useful life and $4,000 estimated residual value. In 2011, Fabio revised its estimates and now believes the laser mitre saw will have a total service life of an additional three years but the residual value will be only $2,000. Fabio uses the straight-line method to amortize all assets. Fabio's Furniture has a December 31 year end. Required: Calculate amortization expense for 2009, 2010 and 2011. 6. In September 2011, East Jet Airlines sells all of its available seats for travel from Calgary to Ixtapa Mexico during the months of December, 2011 and January and February, 2012. Total airfare collected by East Jet for the sale of these airline tickets is $2,400,000. There are an equal number of flights to Ixtapa each month. East Jet's estimated Cost of Sales (fuel, salaries, etc.) is 60%. Required: a. Prepare all of the necessary journal entries for 2011. b. What liabilities, if any, will need to be reflected on the December 2011 balance sheet? Page 3 7. Listed below are various bond terms followed by a series of descriptions of bond characteristics. Match the terms to the descriptions by placing the appropriate letter in the space provided. TERMS A. Bond G. Mortgage bond B. Bond covenants H. Market rate C. Coupon rate I. Coupon payment D. Convertible bond J. Face value E. Debenture F. Early extinguishment of debt DESCRIPTIONS ____ 1.A bond issue with no specific collateral ____ 2.Restrictions placed on a firm that issues bonds ____ 3.Real property as collateral ____ 4.A bond that can be exchanged for common shares ____ 5.Retirement of debt prior to its scheduled maturity date ____ 6.The semi-annual interest payments ____ 7.Generally $1,000 per bond ____ 8.Interest rate used to calculate the interest expense ____ 9.A long-term borrowing with periodic coupon payments for interest and the principal repaid at maturity ____ Interest rate used to calculate the semi-annual interest payments 10. Page 4 8. Listed below are various amortization methods followed by a series of descriptive statements. Match the amortization method to the statements by placing the appropriate letter in the space provided. In some cases, more than one method is appropriate. AMORTIZATION METHODS A. Straight-line D. Capital cost allowance B. Units-of-activity E. None of these C. Double-declining-balance STATEMENTS ____ 1. Results in the measurement of the asset at its fair market value ____ 2. Sometimes used for financial reporting by small businesses ____ 3. The simplest method to apply ____ 4. Produces decreasing amounts of amortization each year ____ 5. Most commonly used method for natural resources ____ 6. Appropriate when related assets generate revenue evenly over their useful lives ____ 7. Required for Canadian tax purposes ____ 8. Provides the largest annual amortization expense for financial reporting in the related asset's first year ____ 9. Residual value is not used in annual amortization expense calculation ____ 10. Annual amortization is calculated using a per-unit cost Page 5 9. Listed below are several types of dividends followed by a series of descriptive characteristics. Match the types of dividends to the characteristics by placing the appropriate letter(s) in the space provided. Some characteristics may pertain to more than one type of dividend. TYPES OF DIVIDENDS A. Cash D. Stock Split B. Stock E. In arrears C. Property CHARACTERISTICS _____ 1. Does not change assets, liabilities, or total shareholders' equity _____ 2. Results in the value per share being changed _____ 3. Pertains to preferred shares only _____ 4. Results in a liability on the date of declaration based on fair market value _____ 5. An entry may not be made on the date of declaration _____ 6. May be reflected with a memorandum entry _____ 7. Reduces total assets and shareholders' equity _____ 8. Increases the number of shares outstanding _____ 9. Results in a change to the number of authorized shares Page 6 10. Sunset Corporation has the following account balances on January 1, 2011: Preferred Shares, $5, non cumulative, non voting, 10,000 $ 250,000 issued Common shares, unlimited number authorized, no par value, voting shares, 150,000 issued $1,500,000 Retained Earnings $ 375,000 The following transactions take place during 2011: Mar 1 – a $0.50 / share cash dividend is declared on common shares Mar 15 – date of record Mar 31 – date of payment July 1 – 2 for 1 stock split Aug 15 – 10% stock dividend declared on common shares, share price is $11 Sept 15 – date of issuance of stock dividend Dec 15 – preferred shares dividend is paid Dec 31 – Net income of $275,000 Required: a. Make all of the necessary journal entries. b. Determine the 2011 year end balance in the preferred shares, common shares and retained earnings accounts. c. Prepare the shareholders equity section of the balance sheet. 11. Listed below are the names and formulas for various financial ratios. Match the formulas to the ratio names by placing the appropriate letter in the space provided. NAMES A. ROE E. ROA I. A/P Turnover B. D/E F. TIE C. Quick ratio G. A/R turnover D. Inventory turnover H. Current Ratio FORMULAS ____ 1. Profit margin ratio × total asset turnover ____ 2. (Net income – preferred dividends) ÷ average shareholders' equity ____ 3. Cost of goods sold ÷ average inventory ____ 4. Credit sales ÷ average accounts receivable ____ 5. Cost of goods sold ÷ average accounts payable ____ 6. Current assets ÷ current liabilities ____ 7. (Cash + accounts receivable + short-term investments) ÷ current liabilities ____ 8. Total liabilities ÷ shareholders' equity ____ 9. (Net income + taxes + interest) ÷ interest Page 7 12. Abbreviated versions of the financial statements for Slate Industries are presented below: SLATE COMPANY Income Statement For the Year Ended December 31, 2011 Sales $1,700,000 Costs and expenses: Cost of sales $1,140,000 Operating expenses 364,800 Interest expense 37,800 1,542,600 Pre-tax income 157,400 Income tax expense 55,090 Net income $ 102,310 SLATE COMPANY Balance Sheet December 31, 2011 2011 2010 Total assets $842,110 $717,800 Total liabilities 329,600 279,600 Total shareholders' equity 512,510 438,200 Preferred share dividends of $18,000 were paid during 2011. Required: a. Calculate the following: (1) Profit margin ratio (2) Total asset turnover (3) Return on assets (4) Return on equity b. Comment on any conclusions you could make concerning the company's financial leverage. Page 8 13. Boulder Inc. has come to the bank you work for looking for a $250,000 long-term loan. The loan committee has asked you to review the following data submitted with Boulder's loan application: 2009 2010 2011 Current assets $316,500 $475,200 $820,800 Current liabilities 120,000 155,400 414,600 Long-term liabilities 60,800 175,200 300,000 Shareholders' equity 303,700 408,600 490,200 Operating income 168,900 103,500 208,500 Interest expense 7,200 13,200 28,500 Income tax expense 65,400 34,200 72,000 Net income 96,300 56,100 108,000 Operating cash flow 106,300 64,200 115,000 Required: a. Calculate the long-term liquidity ratios: Debt/Total Assets, Debt/Equity, times-interest-earned, and operating cash flow to total debt for all three years. b. Write a brief report giving your recommendation on granting the loan. Provide support for your position. Page 9 14. The following are the comparative financial statements for Coconut Corporation for 2011 and 2010. Coconut Corporation Comparative Income Statements For periods ending December 31st 2011 2010 Sales Revenue 167,500 140,000 Cost of Goods Sold: Opening Inventory 25,000 30,000 Add Purchases 100,000 76,000 Add Freight – in 6,000 4,000 Less Ending Inventory 31,000 25,000 Total Cost of Goods Sold 100,000 85,000 Gross Operating Profit 67,500 55,000 Expenses Depreciation / Amortization 15,000 15,000 Selling and Administrative 22,500 15,000 Interest Expense 5,000 2,500 Total Expenses 42,500 32,500 Net Operating Profits (before taxes) 25,000 22,500 Less Income Taxes 10,000 7,500 Net Income 15,000 15,000 Coconut Corporation Comparative Balance Sheets As at December 31 st 2011 2010 Assets Current Assets: Cash 4,000 2,500 Marketable Securities 10,000 7,500 Accounts Receivable 35,000 30,000 Inventory 31,000 25,000 Page 10 Total Current Assets 80,000 65,000 Investments (at cost) 30,000 32,500 Fixed Assets: Property, Plant and Equipment 200,000 190,000 Less: Accumulated Depreciation 87,500 80,000 112,500 110,000 Goodwill 2,500 2,500 Total Assets 225,000 210,000 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable 12,500 10,000 Notes Payable 25,000 20,000 Accrued and Other Liabilities 20,000 15,000 Total Current Liabilities 57,500 45,000 Long Term Liabilities: Bonds and Notes Payable 72,500 78,250 Total Liabilities 130,000 123,250 Shareholders' Equity Common shares 15,000 15,000 Contributed Surplus 55,000 61,750 Retained Earnings 25,000 10,000 Total Shareholders' Equity 95,000 86,750 Total Liabilities and Shareholders' Equity 225,000 210,000 Required: Comment on the financial performance of Coconut Co in terms of: a. Liquidity b. Activity c. Profitability d. Solvency Page 11 15. Listed below are the various types of activities or transactions reported on the cash flow statement, followed by a series of transactions. Match each transaction to its related activity by placing the appropriate letter in the space provided. Assume the indirect method is used. O = Operationg activity F = Financing activity I = Investing activity N = Non-cash transaction 1. Payment of cash dividends _____ _____ 2. Collection from customers _____ 3. Proceeds from sale of patent _____ 4. Payment of interest _____ 5. Purchase of land with common shares _____ 6. P
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