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Practice Exam #1

Part 1 of 2
(Quizzes 1, 2, and 3 and
Enhancement Days 1, 2, and 3)

Accounting 210
1.
2.
3.
4.
5.
6.
7.

This practice exam is in the same multiple-choice format as is the actual exam.
This practice exam contains many more questions than does the actual exam; the
actual exam has only 25 questions.
Every topic covered in a question on the actual exam is addressed in one or
more questions on the practice exam.
Some of the questions on the actual exam will be more difficult than these practice
exam questions; some of the questions will be less difficult.
Of course, no question on the actual exam will be exactly like any question on this
practice exam.
A few of the questions are similar to questions that were on the Blackboard quizzes.
The best way to use the practice exam is to allow it to guide your study of the
material you need to know to do well on the actual exam. You should do the
following.
Complete the practice exam questions WITHOUT peeking at the answers.
Only in this way will you be able to make an accurate assessment of
whether you understand the question material.
Go back to the underlying material either Enhancement Day material or
Blackboard quiz material to study the topics that you dont understand on
the practice exam.
Dont get the mistaken impression that if you memorize every question on
the practice exam you will nail the actual exam. We are familiar with all of
the questions on the practice exam, and we intentionally make the actual
exam questions different. Our intent is to reward students who are not rote
memorizers but who instead attempt to understand the concepts and the
techniques of setting up problems.

1.

Which ONE of the following describes managerial accounting reports and does NOT describe
financial accounting reports.

a.
b.
c.
d.

They are used primarily by creditors and investors.


They are based on generally accepted accounting principles.
They are standardized across companies.
They measure performance and isolate differences between budgeted and actual results.

2.

Consider the following transaction.


Sold merchandise costing $9,000 for $20,000. Of the $20,000, $7,500 was received in cash and the
remainder was on account.
Which ONE of the following is necessary to record this transaction?

a.
b.
c.
d.
e.
f.

DEBIT to SALES for 20,000


DEBIT to SALES for 9,000
DEBIT to COST OF GOOD SOLD for 20,000
DEBIT to ACCOUNTS RECEIVABLE for 20,000
CREDIT to SALES for 20,000
DEBIT to INVENTORY for 9,000

3.

On June 1, the company paid $1,200 in advance for 12 months of rent, with the rental period beginning
on June 1. This $1,200 was recorded as Prepaid Rent.
Which ONE of the following will be included in the ADJUSTING ENTRY necessary on December
31?

a.
b.
c.
d.
e.
f.

DEBIT to PREPAID RENT for 700


DEBIT to CASH for 700
DEBIT to RENT EXPENSE for 700
CREDIT to PREPAID RENT for 500
CREDIT to CASH for 500
CREDIT to RENT EXPENSE for 500

4.

On October 1, the company received $2,400 in advance for 12 months of service to be provided, with
the service period beginning on October 1. This $2,400 was recorded as Unearned Service Revenue.
The service is provided evenly throughout the year. As of the end of the year, no entry has yet been
made to adjust the amount initially recorded.

a.
b.
c.
d.
e.
f.

Which ONE of the following will be included in the ADJUSTING ENTRY necessary on December
31?
DEBIT to UNEARNED SERVICE REVENUE for 1,800
DEBIT to CASH for 1,800
DEBIT to SERVICE REVENUE for 1,800
CREDIT to UNEARNED SERVICE REVENUE for 600
CREDIT to CASH for 600
CREDIT to SERVICE REVENUE for 600

5.

Which ONE of the following is a correct description of the IASB?

a.
b.
c.
d.

Has legal authority to establish financial accounting standards in the United States
Is a subcommittee of the American Institute of Certified Public Accountants (AICPA)
Works under the direction of the SEC
Is a private organization that establishes international accounting standards

6.
a.
b.
c.
d.
7.

Which ONE of the following is part of the journal entry when recording the sale of a building for cash?
debit to Building
debit to Accumulated Depreciation
debit to Gain
debit to Cost of Goods Sold
Which ONE of the following is NOT a reason that an external auditor has to perform an accurate and
reliable audit?

a.
b.
c.

The audit firm wants to maintain its good reputation.


The audit firm wants to reduce the possibility of a shareholder lawsuit.
The audit firm wants to increase the number of seats it has on the board of directors.

8.

During Year 1, Knight Company recorded the following information on its Income Statement:
Sales revenue
Interest expense
Interest income
Gross Profit
Selling and administrative expenses
Income tax expense

$500,000
10,000
15,000
200,000
75,000
12,000

What is Knight Companys cost of goods sold for Year 1?


a.
b.
c.
d.
e.
9.

a.
b.
c.
d.

$ 188,000
$ 220,000
$ 300,000
$ 155,000
$ 430,000
On April 1, Tarazi Company received $3,600 cash in advance for services to be rendered for one year
starting on April 1. Tarazi debited Cash and credited Service Revenue for $3,600. On December 31 of
the same year, the necessary adjusting entry includes
credit to Service Revenue of $2,700
debit to Unearned Service Revenue of $2,700
debit to Service Revenue of $900
debit to Unearned Service Revenue of $900

10. Thomson Company started business on January 1 of Year 1. On December 31 of Year 1, Thomson had
the following account balances:

Accounts receivable:
Sales revenues:
Income taxes payable:
Loan payable:
Cost of goods sold:
Cash:
Inventory:
Operating expenses:
Income tax expense:
Accounts payable:
Property, Plant, and Equipment:
Prepaid Rent:
Bonds Payable:
Capital Stock:

$
$
$
$
$
$
$
$
$
$
$
$
$
$

145,000
991,000
29,000
60,000
627,000
80,000
33,000
235,000
30,000
60,000
166,000
60,000
150,000
86,000

Given these data, what is the total amount of Thomsons Stockholders Equity as of December 31 of Year
1?
a.
b.
c.
d.
e.

$ 86,000
$ 99,000
$185,000
$299,000
$484,000

11. On September 1, Mora Company paid $6,000 for two years rent and recorded the entire amount as a
debit to prepaid rent. The adjusting entry on December 31 of that same year would include a:
a.
b.
c.
d.

Credit to Rent Expense of $2,000


Credit to Prepaid Rent of $2,000
Debit to Rent Expense of $3,000
Debit to Rent Expense of $1,000

12. Which ONE of the following accounts will be CREDITED when making closing entries?
a.
b.
c.
d.
e.

Sales Revenue
Dividends
Cash
Accounts Payable
Paid-in Capital

13. Calculate WRM, Inc.'s DAYS PURCHASES IN ACCOUNTS PAYABLE in 20x4 given the following
information for the years ended 12/31/x3 and 12/31/x4. Round to the nearest whole day.
Cash
Accounts Receivable
Inventory
Accounts Payable
Sales Revenues
Cost of Goods Sold
a.
b.
c.
d.

12/13/x3
$24,528
54,777
109,861
46,858
690,236
403,284

12/31/x4
$27,564
70,923
165,225
50,228
805,213
500,385

42 days
90 days
32 days
35 days

14. Lily Company reported the following balance sheet information as of December 31, 20x4.
Current Assets
Long-term Assets
Current Liabilities
Long-term Liabilities
Common Stock
Retained Earnings (ending)

$5,000
15,000
2,000
7,000
4,000
7,000

Compute Lily Companys DEBT-TO-EQUITY RATIO as of December 31, 20x4.


a.
b.
c.
d.
e.

0.82
2.22
1.22
0.55
0.45

15. For the year 20x4, Lorien Company reported net income of $150,000. Lorien has not provided you
with all of the detailed revenues and expenses that went into the calculation of this $150,000 net
income. However, you do know that sales for the year were $900,000, depreciation expense was
$60,000, interest expense was $45,000, and income tax expense was $75,000. Using these data,
compute Lorien Companys TIMES INTEREST EARNED RATIO for the year 20x4.
a.
b.
c.
d.
e.

5.00
4.33
8.57
6.00
8.50

16. For the year 20x4, Pecos Yo Company computed the following ratios related to the DuPont
Framework.
Leverage
Profitability
Efficiency

3.60
0.11
0.95

In addition, Pecos Yo reported a current ratio of 1.55 as of the end of the year, and an earnings per share
(EPS) of $2.92.
Pecos Yos RETURN ON EQUITY for the year 20x4 is
a.
b.
c.
d.
e.

0.376
0.583
1.099
1.703
0.105

17. The following items have been extracted from the financial statements of Lorien Company for the year
20X1.
Total liabilities...........................................................................$700
Unearned revenue..........................................................................50
Retaining earnings (as of January 1, 20X1).................................400
Operating expenses......................................................................220
Sales..........................................................................................1,000
Prepaid insurance.........................................................................160
Interest expense..............................................................................40
Cost of goods sold........................................................................600
What is the value of Lorien Companys TIMES INTEREST EARNED ratio for 20X1?
a.
b.
c.
d.
e.
f.
g.
h.

4.5
25.0
10.0
5.5
3.5
5.8
1.8
1.3

18. The following information is for Yosef Company:


Sales
Accounts Payable
Retained Earnings
Inventory
Accounts Receivable
Cost of Goods Sold

20X2
$260,000
10,000
125,000
40,000
25,000
180,000

20X1
$320,000
20,000
78,000
50,000
20,000
200,000

For 20X2, compute the average number of days that elapse from the time Yosef sells inventory until
the time Yosef collects the cash from the sale of that inventory.
a.
b.
c.
d.
e.
f.
g.
19.

a.
b.
c.
d.
e.
f.
g.
h.

122.9 days
59.7 days
116.2 days
31.6 days
32.2 days
114.7 days
94.8 days
Portland Company sold equipment with a book value of $600. The company recorded a gain on the
sale of $450. The original cost of the equipment was $2,000. In the journal entry to record the sale
of the equipment for cash, which ONE of the following items would appear?
Debit to Accumulated Depreciation for $600
Debit to Accumulated Depreciation for $2,000
Debit to Gain on Sale of Equipment for $450
Debit to Equipment for $2,000
Credit to Equipment for $600
Debit to Equipment for $1,400
Debit to Cash for $600
Debit to Cash for $1,050

20.

On December 31, 20X1, Thomson Company had the following account balances:

Accounts receivable....................................................................................$15,000
Sales revenues............................................................................................845,000
Retained earnings (beginning of year, January 1, 20X1)........................120,000
Income taxes payable...................................................................................25,000
Loan payable................................................................................................45,000
Cost of goods sold......................................................................................650,000
Cash..............................................................................................................65,000
Inventory.......................................................................................................20,000
Common stock..............................................................................................41,000
Operating expenses.....................................................................................196,000
Income tax expense......................................................................................25,000
Unearned revenue.........................................................................................55,000
Property, plant, and equipment...................................................................145,000
Prepaid rent...................................................................................................50,000
Bonds payable..............................................................................................35,000
Given these data, what is Thomsons ASSET TURNOVER RATIO as of December 31, 20X1?
a.
b.
c.
d.
e.
f.
g.
h.

0.54
0.84
1.88
3.49
0.78
1.74
2.86
0.35

21.

The numbers below are for Iffy Company and Model Company. Both Iffy and Model are in the
same industry. You should view Model Company as a well-run company that serves as the
standard for other companies in the industry.
Iffy
Model
Cash
500
600
Accounts Receivable
400
4,800
Inventory
1,100
10,200
Property, Plant, and Equipment
3,000
14,400
Total Assets
5,000
30,000
Total Liabilities
Total Equity
Sales
Cost of Goods Sold
Wage Expense
Other Expenses
Net Income

3,000
2,000

18,000
12,000

10,000
7,000
2,000
700
300

60,000
48,000
4,500
5,000
2,500

Which ONE of the following statements is TRUE?


a.
b.
c.
d.
e.

Cost of Goods Sold is a problem for Iffy Company.


Other expenses are a problem for Iffy Company.
Accounts Receivable management is a problem for Iffy Company.
Cash management is a problem for Iffy Company.
Inventory management is a problem for Iffy Company.

22.

You are a financial analyst trying to estimate the appropriate price of a share of Kamila Company stock.
You have collected the information below. This information relates to companies in Kamilas industry.

High P/E ratio


Average P/E ratio
Low P/E ratio

45.0
20.0
10.0

High P/B ratio


Average P/B ratio
Low P/B ratio

5.0
1.6
0.7

Kamila Company is expected to have high earnings growth of 15% per year over the next four to five years.
However, in the past the company has had only average ROE, averaging just 12% per year for the past three
years. Kamila Companys most recent EPS was $1.50 per share. Kamila Companys book value per share is
$40.00. Estimate the market price of a share of Kamila Companys stock.
a.
b.
c.
d.
e.
f.
g.

$15.00
$30.00
$7.50
$40.00
$80.00
$180.00
$65.00

23.

The accountant for Harry Baby Company has assembled the following preliminary data and
background information at the end of 2002:

Preliminary Data (ending balances except where indicated)


Cash
Accounts Receivable
Less: Allowance for Bad Debts*
Building
Less: Accumulated Depreciation (beginning balance)
Environmental Cleanup Obligation**
Paid-in Capital
Retained Earnings (beginning balance)
Total Revenue

$100
1,000
20
10,000
0
580
3,500
4,000
3,000

The $20 allowance for bad debts amount reflects the beginning balance less amounts written off during
the year.
** The $580 environmental cleanup obligation amount reflects the beginning balance less amounts
actually spent during the year. No amount has been added to reflect additional environmental damage
created during the year.
Background Information
1. Harry Baby estimates bad debt expense using a percentage of the ending balance in accounts
receivable. Historically, the percentage has ranged from 6% of ending accounts receivable to 18% of
ending accounts receivable.
2. Harry Baby uses straight-line depreciation. As of the beginning of the year, the building was new.
Other companies in Harry Babys industry use depreciation lives ranging from 10 years to 25 years for
similar buildings.
3. Over the past five years, Harry Baby has added between $300 and $900 per year to the estimated
environmental cleanup obligation.
Compute the LOWEST net income that Harry Baby can report but still remain in the acceptable
range of estimates.
a.
b.
c.
d.
e.
f.
g.

Lowest net income, $920


Lowest net income, $940
Lowest net income, $1,840
Lowest net income, $1,520
Lowest net income, $1,540
Lowest net income, $2,260
Lowest net income, $2,280

24.

Lily Company had the following account totals as of December 31, 20X2.
Cost of goods sold.......................................................................$ 50,000
Accounts receivable.....................................................................100,000
Wages payable...............................................................................10,000
Accounts payable...........................................................................25,000
Sales.............................................................................................200,000
Inventory......................................................................................150,000
Bank Loan Payable (to be repaid in 6 years).................................25,000
Cash................................................................................................18,000
Retained earnings (beginning of year, January 1, 20X2)..............80,000
Paid-in capital................................................................................38,000
Equipment......................................................................................60,000

What is Lily Companys ACID-TEST RATIO? Note: The acid-test ratio is also called the quick ratio.
a.
b.
c.
d.
e.
f.
g.
g.

3.37
7.66
4.72
1.97
3.11
2.97
1.03
4.46

25. On September 1, 20X1, MaScare Company paid $4,800 for an insurance policy on some equipment
that will be in effect for the 12 months from September 1, 20X1 through August 31, 20X2. MaScare
recorded this payment on September 1 by debiting Insurance Expense. The necessary adjusting entry
on December 31, 20X1includes a
a.
b.
c.
d.
e.
f.
g.
h.

Debit to Insurance Expense of $1,600


Credit to Insurance Expense of $1,600
Debit to Insurance Expense of $3,200
Credit to Insurance Expense of $3,200
Debit to Insurance Expense of $1,200
Credit to Insurance Expense of $1,200
Debit to Insurance Expense of $3,600
Credit to Insurance Expense of $3,600

26. Which ONE of the following statements is TRUE?


a.
b.
c.
d.
e.
f.

The purpose of financial reporting is to increase the cost of capital.


The purpose of financial reporting is to increase information risk.
For an auditor, signing an audit opinion is a calculated risk.
Financial analysts do NOT have an incentive to bias their analysis of a company because the
analysts are paid by the SEC.
According to U.S. law, auditors cannot be sued by shareholders of bankrupt companies for which
the auditor audited the financial statements before the bankruptcy.
Preparation of financial statements does NOT require the making of any assumptions, estimates,
or judgements.

27. Below are summaries of the balance sheets of five companies. The amounts are all stated as a
percentage of total assets.
A

Receivables

10

78

80

Inventory

60

30

Cash and investment securities

35

20

70

10

Property, plant, and equipment

35

25

25

10

Short-term payables

20

20

Other current liabilities

10

90

Long-term liabilities

20

30

35

25

Equity

55

40

60

70

Which ONE of the balance sheet columns is most likely to be from a retailer that only makes cash sales?
a.
b.
c.
d.
e.

Company A
Company B
Company C
Company D
Company E

28. Below are data for Company F for Year 1, Year 2, and Year 3.
Income from Continuing Operations
+/- Income (Loss) from Discontinued Operations
+/- Extraordinary Gain (Loss)
= Net Income

Year 3
25,000
(12,000)
65,000
78,000

Year 2
20,000
30,000
18,000
68,000

Year 1
16,000
18,000
0
34,000

+/- Unrealized Gains (Losses) not included in Net Income


= Comprehensive Income

23,000
101,000

(11,000)
57,000

42,000
76,000

Using these data, compute the best prediction of Company Fs NET INCOME for Year 4.
Choose the best response from the list below.
a.
b.
c.
d.
e.

$20,000
$31,250
$60,000
$78,000
$88,000

29. You are a banker. You have received cash flow data from Companies A, B, C, and D. All companies
are the same size in terms of total assets.
Cash Flow from Operating Activities

Company A
$50,000

Cash Flow from Investing Activities

35,000

(900,000)

(100,000)

(200,000)

Cash Flow from Financing Activities

120,000

750,000

70,000

(170,000)

$205,000

$50,000

$150,000

($250,000)

Net Change in Cash

Company B
$200,000

Company C
$180,000

Company D
$120,000

To which of these four companies would you prefer to give a loan? Assume that all of the loans are
of the same amount and that the interest rate charged is the same for all of the loans.
a.
b.
c.
d.

Company A
Company B
Company C
Company D

30.

The numbers below are for Iffy Company and Model Company.

Total Assets

Iffy
5,000

Model
22,000

Total Liabilities
Total Equity

3,000
2,000

11,000
11,000

20,000

44,000

1,000

5,500

Sales
Net Income

Which ONE of the following pairs of ratio values is correct?


a.
b.
c

Iffys ROE is 20.0%; Models Asset Turnover is 4.00.


Iffys Profit Margin is 5.0%; Models ROE is 50.0%.
Iffys Asset Turnover is 0.25; Models Profit Margin is 25.0%.

31. The numbers below are for Utah Company and BYU Company. BYU Company is the standard in
the industry.

Cash
Accounts Receivable
Inventory
Plant and Equipment

Sales
Net Income

Utah
50
700
500
1,000

BYU
1,000
4,000
8,000
15,000

10,000
200

100,000
5,000

Which ONE of the following statements is TRUE with respect to Utah Company?
a.
b.
c
d

Cash management is a problem for Utah Company.


Accounts Receivable management is a problem for Utah Company.
Inventory management is a problem for Utah Company.
Plant and Equipment management is a problem for Utah Company.

32.

With respect to the comparison between Wal-Mart and KMart in 1999, which ONE of the
following statements is TRUE?

a.

The numbers offer strong evidence that Wal-Mart was more efficient at managing its inventory in
1999 than was KMart.
The numbers offer strong evidence that Wal-Mart was able to buy its inventory at much lower
prices in 1999 than was KMart.
The numbers offer strong evidence that Wal-Mart was able to control its overhead expenses in
1999 much better than was KMart.
The numbers offer strong evidence that Wal-Mart had much lower interest expense in 1999 than
did KMart.

b.
c.
d.

33.

Which ONE of the following statements is FALSE?

a.
b.

Market prices summarize a large amount of information.


We can discern new information by observing the behavior of others in markets -- especially by
observing the behavior of sophisticated market participants.
There are no predictable relationships between accounting data (such as earnings or stockholders
equity) and company market values.

c.

34.

Company A is expected to have low earnings growth of 2% per year over the next four to five years.
However, in the past the company has had very high ROE, averaging over 25% per year for the past
three years. Company As most recent EPS was $1.50 per share. Company As book value per share is
$5.00. Estimate the market price of a share of Company As stock.

The following data have been gathered for companies in Company As industry.
High P/B ratio
Average P/B ratio
Low P/B ratio

5.0
2.0
0.5

Which ONE of the following is the best estimate of Company As stock price?
a.
b.
c.
d.
e.
f.
g.

$0.75 per share


$2.50 per share
$3.00 per share
$5.00 per share
$7.50 per share
$10.00 per share
$25.00 per share

Solutions
1.

The answer is D. Financial accounting reports are used primarily by creditors and investors and
are based on generally accepted accounting principles that are standardized across companies.
Financial accounting reports do NOT include budget information; this type of information is
kept internal to the company and is reported in managerial accounting reports.

2.

The answer is E. The correct journal entries are as follows.


Cash
Accounts Receivable
Sales
Cost of Goods Sold
Inventory

3.

7,500
12,500
20,000
9,000
9,000

The answer is C. The correct journal entry is as follows.


Rent Expense
Prepaid Rent

700
700

Expense: ($1,200 12 months) 7 months = $700


4.

The answer is F. The correct journal entry is as follows.


Unearned Service Revenue
Service Revenue

600
600

Expense: ($2,400 12 months) 3 months = $600


5.

The answer is D.

6.

The answer is B

Correct Journal Entries:


Cash
Accumulated Depreciation
Building

xxx
xxx
xxx

Cash
Accumulated Depreciation
Gain on sale
Building

xxx
xxx

Cash
Accumulated Depreciation
Loss on sale
Building
.

xxx
xxx
xxx

xxx
xxx

xxx

7.

The answer is C.

8.

Solution: c.

By definition, gross profit is the amount of sales revenue left, after taking out the cost of goods sold,
to cover other expenses.
Therefore, Gross Profit = Sales Revenue Cost of Goods Sold
By using algebra, Cost of Goods Sold = Sales Revenue Gross Profit
In this problem, Cost of Goods Sold = $500,000 $200,000 = $300,000
None of the other accounts were relevant in determining this answer.
9.

Solution: c.

Tarazi received $3,600 for a years worth of services. Assuming the services were performed equally
each month, this $3,600 payment covers $300 of services each month. If Tarazi had received this
prepayment on January 1, then no adjusting entry would be necessary because all of the services
would have been performed and the recognition of $3,600 of revenue would be justified. However, at
the end of the year, Tarazi still has an obligation to perform 3 months (or $900) of services. Thus,
Tarazi can only recognize the portion of Sales Revenue that has actually been earned for the year
which is 9 months (or $2,700) of services. Accordingly, the following entries were made:
Aug. 1

Cash ($300 * 12)


3,600
Service Revenue
3,600
To recognize receipt of $3,600 for 12 months of services

Dec. 31

Service Revenue
900
Unearned Service Revenue
900
To adjust for 3 months of services not yet performed

10.

Solution: c.

Assets
Cash
Accounts receivable
Inventory
Prepaid Rent
Property, Plant, and Equipment

Liabilities
Accounts payable
Income taxes payable
Loan payable
Bonds payable

Stockholders' Equity
Capital Stock
Sales revenues
Cost of goods sold
Operating expenses
Income tax expense

$
$
$
$
$
$

80,000
145,000
33,000
60,000
166,000
484,000

$
$
$
$
$

60,000
29,000
60,000
150,000
299,000

$
$
$
$
$
$

86,000
991,000
(627,000)
(235,000)
(30,000)
185,000

Revenue, expense, and dividend accounts are subcategories of retained earnings. These accounts are
closed to retained earnings at the end of the year. In this example, because this is the companys first
year of business, the beginning balance in retained earnings is zero.
Assets Liabilities = Stockholders Equity
$484,000 - $299,000 = $185,000
11.

Solution: d.

Mora Company recorded the following journal entries (using the asset approach):
Sept. 1
Prepaid Rent ($250 * 24)
6,000
Cash
6,000
To record $6,000 prepayment of rent for 24 months
Dec. 31 Rent Expense ($250 * 4)
1,000
Prepaid Rent
1,000
To record rent expense for 4 months of year

12.

solution B

Only revenue, expense, and dividend accounts are closed. No balance sheet accounts are closed.
Sales revenue is closed with a debit. Dividends is closed with a credit.
13.

Solution: c

The number of days purchases in accounts payable reveals the average length of time that elapses
between the purchase of inventory on account and the cash payment for that inventory.
Number of Days Purchases = _
365 Days
_
In Accounts Payable
Purchases/Average Accounts Payable
Average Accounts Payable (A/P)= *[A/P (ending balance) A/P (beginning balance)]
Amount of Inventory Purchased during the Year = Cost of Goods Sold for the year + the change in
Inventory (ending balance beginning balance) for the year
Average Accounts Payable = ($46,858 + $50,228)/2 = $48,543
Purchases = $500,385 + ($165,225 - $109,861) = $555,749
Number of Days Purchases in Accounts Payable = 365 / ($555,749 / $48,543) = 32 days
14.

Solution: a.

The debt-to-equity ratio measures the balance of funds being provided by creditors and stockholders.
The higher the debt-to-equity ratio, the more debt the company has.
Debt-to-equity ratio = Total liabilities/Total stockholders equity
Current Assets
Long-term Assets
Total Assets
Current Liabilities
Long-term Liabilities
Total Liabilities
Common Stock
Retained Earnings (ending)
Total Stockholders' Equity
Debt-to-Equity Ratio

5,000
15,000
20,000
2,000
7,000
9,000
4,000
7,000
11,000
0.82

15.

Solution: d.

Times interest earned is the ratio of the income that is available for interest payments to the annual
interest expense. This ratio serves as an indication of the borrowing companys ability to meet the
required interest payments.
Times interest earned = Income before interest and taxes (operating profit)
Annual interest expense
Income before interest and taxes = Net income + Interest expense + Income tax expense
Income before interest and taxes is often called EBIT (earnings before interest and taxes).
Net Income
Sales Revenue
Depreciation Expense
Interest Expense
Income Tax Expense

150,000
900,000
60,000
45,000
75,000

Income before Interest and Taxes


Interest Expense
Times Interest Earned

270,000
45,000
6.00

16.

Solution: a.

The DuPont framework provides a systematic approach for breaking down return on equity into
three ratios: profit margin (profitability), asset turnover (efficiency), and assets-to-equity ratio
(leverage)
Return on equity = Profitability * Efficiency * Leverage
Leverage
Profitability
Efficiency
Current Ratio
EPS
Return on Equity

3.60
0.11
0.95
1.55
2.92
0.376

17. Solution a
EBIT = Earnings before interest and taxes = Operating income
EBIT = Sales - Cost of Goods Sold Operating Expenses
EBIT = $1,000 - $600 - $220 = $180
Interest Expense = $40
Times interest earned = EBIT / Interest Expense = $180 / $40 = 4.5

18. Solution d
31.6 days = (($25,000 + $20,000)/2)/($260,000/365)
19.

Solution h
Cash
Accumulated Depreciation
Gain on Sale of Equipment
Equipment

1,050
1,400
450
2,000

20.
solution g
Assets
Accounts receivable......................................................................15,000
Cash...............................................................................................65,000
Inventory.......................................................................................20,000
Property, plant, and equipment................................................145,000
Prepaid rent..................................................................................50,000
TOTAL........................................................................................295,000
Asset Turnover Ratio: Sales / Total Assets = 845,000 / 295,000 = 2.86
21. Solution d
ROE

Iffy
Model

Net Income
----------Sales

Sales
----------Assets

3.0%
4.2%

Assets
----------Equity

2.00
2.00

2.50
2.50

Cash
Accounts Receivable
Inventory
Property, Plant, and Equipment
Total Assets

Iffy
500 5.0%
400 4.0%
1,100 11.0%
3,000 30.0%
5,000

Model
600 1.0%
4,800 8.0%
10,200 17.0%
14,400 24.0%
30,000

Total Liabilities
Total Equity

3,000
2,000

18,000
12,000

Sales
Cost of Goods Sold
Wage Expense
Other Expenses
Net Income

10,000
7,000 70.0%
2,000 20.0%
700 7.0%
300 3.0%

60,000
48,000 80.0%
4,500 7.5%
5,000 8.3%
2,500 4.2%

22.

Solution g

An estimate of Kamila Companys price per share using earnings is as follows:


Price per share =
=

EPS of $1.50 High P/E Ratio of 45


$67.50

An estimate of Kamila Companys price per share using book value is as follows:
Price per share =
=

Book value per share of $40.00 Average P/B Ratio of 1.6


$64.00

With these estimates, we would guess that Kamila Companys stock price should be somewhere between
$64.00 per share and $67.50 per share.
23.

solution b

LOWEST NET INCOME = HIGHEST EXPENSE


Cash
Accounts Receivable
Less: Allowance for Bad Debts ($1,000 0.18)
Building
Less: Accumulated Depreciation ($1,000)
Total Assets

100
1,000
(180)
10,000
(1,000)
9,920

Environmental Cleanup Obligation ($580 + $900)

1,480

Paid-in Capital
Retained Earnings ($4,000 + $940)
Total Liabilities & Equities

3,500
4,940
9,920

Total Revenue
Depreciation Expense
Bad Debt Expense ($180 - $20)
Environmental Cleanup Expense
Net Income

3,000
(1,000)
(160)
(900)
940

24. solution a
QUICK ASSETS = Accounts Receivable $100,000 + Cash $18,000 = $118,000
CURRENT LIABILITIES = Wages Payable $10,000 + Accounts Payable $25,000 = $35,000
QUICK RATIO = $118,000 / $35,000 = 3.37

25.

solution d

Prepaid Insurance is the amount REMAINING.


$4,800 / 12 months = $400 per month
8 months remaining: Jan, Feb, Mar, Apr, May, June, July, August
8 x $400 = $3,200
Total Prepaid Insurance at December 31, 20X1 should be $3,200
Insurance Expense is the amount USED.
$4,800 / 12 months = $400 per month
4 months used: Sep, Oct, Nov, Dec
4 x $400 = $1,600
Total Insurance Expense for 20X1 should be $1,600
Insurance Expense before adjustment = $4,800
Prepaid Insurance before adjustment = $0
Prepaid Insurance
Insurance Expense ($4,800 - $1,600)

3,200
3,200

26. solution c
27. solution a
A retailer will have a substantial amount of inventory. So C, D, and E are out.
A retailer that only makes cash sales will have no receivables. So the answer is A.
28. solution b
The best predictor of next years net income is derived from INCOME FROM CONTINUING
OPERATIONS.
Income from continuing operations has increased 25% in each of the past two years.
Another 25% increase would yield Year 4 net income of $31,250.
29. solution c

The key number is cash flow from operating activities.


The key relationship is the relationship between the amount of operating cash flow and the
amount of investing cash flow.
Only Company C has an excess of operating cash flow over investing cash flow needs (except for
Company A which is a strange company because it has positive cash from investing activities).

30. solution b
Iffys Profit Margin = $1,000 / $20,000 = 5.0%
Models ROE = $5,500 / $11,000 = 50.0%
31. solution b
Accounts Receivable is 7.0% of sales for Utah but just 4.0% of sales for BYU.
32. solution c
As illustrated in class.
33. solution c
Both the P/E ratio and the P/B ratio illustrate that there are predictable relationships between
accounting data and company market values.
34. solution g
High past ROE means that Company A will have a high P/B ratio.
Book value per share of $5.00 5.0 High P/B ratio = $25.00

Practice Exam #1
Part 2 of 2
(Quizzes 4, 5, and 6 and
Enhancement Day 4)

Accounting 210
1.
2.
3.
4.
5.
6.
7.

This practice exam is in the same multiple-choice format as is the actual exam.
This practice exam contains many more questions than does the actual exam; the
actual exam has only 25 questions.
Every topic covered in a question on the actual exam is addressed in one or
more questions on the practice exam.
Some of the questions on the actual exam will be more difficult than these practice
exam questions; some of the questions will be less difficult.
Of course, no question on the actual exam will be exactly like any question on this
practice exam.
A few of the questions are similar to questions that were on the Blackboard quizzes.
The best way to use the practice exam is to allow it to guide your study of the
material you need to know to do well on the actual exam. You should do the
following.
Complete the practice exam questions WITHOUT peeking at the answers.
Only in this way will you be able to make an accurate assessment of
whether you understand the question material.
Go back to the underlying material either Enhancement Day material or
Blackboard quiz material to study the topics that you dont understand on
the practice exam.
Dont get the mistaken impression that if you memorize every question on
the practice exam you will nail the actual exam. We are familiar with all of
the questions on the practice exam, and we intentionally make the actual
exam questions different. Our intent is to reward students who are not rote
memorizers but who instead attempt to understand the concepts and the
techniques of setting up problems.

1.

Consider the following three cash flows.

Cash paid to repurchase shares of a companys stock


Cash paid for wages
Cash paid for interest

Which ONE of the following sequences represents the CORRECT categorization of these three cash flows?
a.
b.
c.
d.
e.
f.

Repurchase financing; wages investing; interest operating


Repurchase financing; wages operating; interest operating
Repurchase financing; wages investing; interest investing
Repurchase investing; wages investing; interest operating
Repurchase investing; wages operating; interest operating
Repurchase investing; wages operating; interest financing

2.

During 20x4, Nancy Company had total Cost of Goods Sold of $500,000 and total Sales of
$600,000. The beginning and ending balances in the accounts PAYABLE account are respectively
$60,000 and $100,000. The beginning and ending balances in the inventory account are $120,000
and $135,000, respectively. The beginning and ending balances in the accounts RECEIVABLE
account are respectively $100,000 and $77,000. Compute the amount of cash paid for inventory
during 20x4.

a.
b.
c.
d.

$525,000
$475,000
$555,000
$577,000

3.

Sabo Company's financial statements show a net income of $243,000. The following items also
appear on Sabos financial statements.

Depreciation expense: $55,000


Accounts receivable decrease: $60,000
Prepaid rent increase: $40,000
Accounts payable decrease: $45,000

What is Sabos net cash flow from operating activities?


a.
b.
c.
d.
e.

$233,000
$353,000
$273,000
$243,000
$363,000

4.

DeeAnn Company's financial statements show the following.

Sales: $300,000
Wage Expense: $120,000
Accounts receivable decrease: $54,000
Prepaid rent increase: $33,000
Rent Expense: $75,000
Wages payable decrease: $39,000
Depreciation expense: $37,500

DeeAnn has no other revenues or expenses. What is DeeAnns net cash flow from operating activities?
a.
b.
c.
d.
e.

$67,500
$109,500
$138,000
$87,000
$165,000

5.

Yokum Company had the following transactions for 2001.

Collections on accounts receivable $236,250


Payments on inventory $168,750
Payments for wages and salaries $78,750
Payments of dividends $11,250
Depreciation expense $22,500
Income taxes paid - $27,000
Proceeds received from sale of equipment $225,000
Utilities paid $6,750
Interest paid on note to local bank $5,625
Proceeds from issuance of common stock - $56,250

Using the transactions above, compute the net cash flow from operating activities.
a.
b.
c.
d.
e.
f.

$523,125
($523,125)
$50,625
($50,625)
$225,000
($225,000)

6.

a.
b.
c.
d.
e.

7.

Portland Company sold equipment with a book value (historical cost accumulated depreciation) of
$1,200 for $1,100 cash. Total depreciation expense for the year was $800. The beginning and
ending balances in the Accumulated Depreciation account are $2,000 and $1,400, respectively. The
beginning and ending balances in the Property, Plant, and Equipment account are $7,000 and $7,400
respectively. How much equipment did Portland Company purchase during the year?
$400
$1,800
$2,600
$3,000
$1,600

The following information relates to Equipment and related accounts of El Sheikh


Corporation.

Equipment, beginning balance......................................................................$70,000


Equipment, ending balance...........................................................................100,000
Equipment sold during the year:
Original cost..........................................................................................9,000
Book value............................................................................................2,000
Fully depreciated equipment disposed of during the year: Original cost.........3,000
Accumulated Depreciation, beginning balance..............................................50,000
Accumulated Depreciation, ending balance...................................................42,000
Assuming that all equipment purchases are for cash, how much cash was used to
purchase equipment during the year?
a.
b.
c.
d.

$44,000
$33,000
$42,000
$40,000

8.

The following financial information is available for Ligutti Company as of the end of 20X3.

Cash
Accounts receivable
Buildings
Accumulated depreciation
Land

Accounts payable
Long-term notes payable
Common stock
Retained earnings

20X3
$12,000
25,000
97,000
(25,000)
35,000
$144,000

20X2
$15,000
22,000
42,000
(20,000)
20,000
$79,000

$ 25,000
40,000
50,000
29,000
$144,000

$20,000
15,000
30,000
14,000
$79,000

Additional information:
Dividends paid during 20X3 totaled $15,000.
Net income for 20X3 was $30,000.
No buildings were sold during 20X3.
Note that the end-of-year information is in the LEFT column!!
What was the net cash provided by (used in) investing activities during 20X3?
a.
b.
c.
d.
9.

($55,000)
($70,000)
$55,000
$70,000
Chen Corporation had the following cash flows during 20X3.

Cash receipt from the issuance of stock.....................................................$40,000


Cash received from customers......................................................................20,000
Interest received on long-term investments..................................................10,000
Cash paid for wages......................................................................................12,000
Cash paid for insurance..................................................................................1,000
Cash paid for dividends..................................................................................6,000
Cash paid to purchase building.....................................................................60,000
Cash paid to purchase land...........................................................................20,000
Given this information, net cash inflow (outflow) from investing activities is:
a.
b.
c.
d.

($20,000)
($60,000)
($80,000)
($86,000)

10.
a.
b.
c.
d.
e.
f.
11.

a.
b.
c.
d.
e.
12.

Which ONE of the following would be reported as an investing activity on a statement of cash
flows?
Amount collected on accounts receivable
Amount received as new investment from stockholders
Amount borrowed
Amount paid as cash dividends
Amount paid to repurchase shares of stock
Amount collected from the sale of a building
During 20x4, Nancy Company had total expenses of $420,000 and total revenues of $690,000. The
beginning and ending balances in the common stock account are respectively $120,000 and
$240,000. The beginning and ending balances in the cash account are $150,000 and $175,000,
respectively. The beginning and ending balances in the retained earnings account are respectively
$250,000 and $215,000. Compute the amount of cash paid for DIVIDENDS during 20x4.
$305,000
$245,000
$150,000
$235,000
$390,000
Calculate Tarazi Companys cash flow from FINANCING ACTIVITIES in 20x5 given the
following balance sheet information as of 12/31/x4 and 12/31/x5.
Long-term Debt
Retained Earnings
Accounts Payable
Property, Plant, and Equipment
Common Stock
Accumulated Depreciation

12/31/x4
$15,437
64,034
32,123
456,329
39,682
210,678

12/31/x5
$18,967
95,561
35,168
523,867
51,005
264,763

Note: Net income for the year was $125,000. Included in the computation of this $125,000 net income was
depreciation expense of $25,000.
a.
b.
c.
d.
e.
f.
13.
a.
b.
c.
d.
e.
f.

+ $14,853
+ $46,380
- $78,620
+ $71,380
- $13,453
- $38,453
Which ONE of the following would NOT be reported as a financing activity on a statement of cash
flows?
Repayment of a loan
Payment of interest
Receipt of cash from borrowing
Receipt of cash from new stockholder investment
Payment of dividends
Payment of cash to repurchase shares of stock

14.

Chen Corporation had the following cash flows during 20X3.


Cash receipt from the issuance of stock........................$30,000
Cash received from customers.........................................15,000
Interest received on long-term investments.......................7,500
Cash paid for wages...........................................................9,000
Cash paid for insurance........................................................750
Cash paid for dividends.....................................................4,500
Cash paid to purchase building........................................45,000
Cash paid to purchase land..............................................15,000

Given this information, net cash inflow (outflow) from financing activities is:
a.
b.
c.
d.
15.

$30,000
$25,500
($4,500)
($19,500)
The following financial information is available for Ligutti Company.

Cash
Accounts receivable
Buildings
Accumulated depreciation
Land
Accounts payable
Long-term notes payable
Common stock
Retained earnings

20X5
$ 27,000
37,500
162,000
(30,000)
45,000
$241,500

20X4
$22,500
33,000
67,500
(24,000)
30,000
$129,000

$ 39,000
75,000
75,000
52,500
$241,500

$33,000
30,000
45,000
21,000
$129,000

Additional information:
Net income for 20X5 was $40,000.
No buildings were sold during 20X5.
All building purchases made during 20X5 were made with cash.
Note: The end-of-year data are in the LEFT column.
What was the net cash provided by (used in) financing activities?
a.
b.
c.
d.

$30,000
$61,500
$66,500
$75,000

16. Derrald Company's financial statements show the following items.


Insurance expense................................................................$ 32,000
Cost of goods sold...................................................................80,000
Inventory decrease..................................................................36,000
Gain on sale of equipment......................................................13,000
Prepaid insurance decrease.....................................................22,000
Interest revenue.......................................................................50,000
Sales......................................................................................200,000
Dividends (declared and paid)................................................40,000
Accounts payable decrease.....................................................18,000
Interest receivable increase.....................................................26,000
Depreciation expense..............................................................25,000
Derrald has no other revenues or expenses. What is Derralds net cash flow from operating activities?
a.
b.
c.
d.
e.
f.
g.
h.

$152,000
$178,000
$112,000
$138,000
$102,000
$128,000
$108,000
$68,000

Use the following information in answering questions 17 through 24.


Below are balance sheet and income statement data for Yu Simon Company. Note: For the
balance sheet data, the end-of-year information is in the left column.
Balance Sheet Data
20X2
20X1
Accounts Payable........................................................................................................70.................85
Accounts Receivable................................................................................................150...............120
Accumulated Depreciation.......................................................................................300...............240
Cash
....................................................................................................................120.................80
Common Stock.........................................................................................................450...............410
Equipment.................................................................................................................700...............800
Inventory...................................................................................................................100...............145
Long-term Debt............................................................................................................0...............355
Prepaid Insurance........................................................................................................40...................0
Retained Earnings (ending balance, after closing)...................................................290.................55
Income Statement Data (for 20X2)
Sales .......................................................................................................................................3,000
Gain on Sale of Equipment..............................................................................................................35
Cost of Goods Sold................................................................................................2,000
Insurance Expense....................................................................................................655
Depreciation Expense...............................................................................................100
Total Expenses
2,755
Net Income.....................................................................................................................................280
Additional Information:
a. Equipment with a book value of $300 was sold during 20X2.
b. All accounts payable relate to inventory purchases.
17.

Compute the amount of Cash Paid for Inventory Purchases in 20X2.


a.
b.
c.
d.
e.
f.
g.
h.

18.

$2,030
$2,060
$1,940
$1,970
$2,000
$2,045
$1,955
$2,015
Compute the amount of Cash Collected from Customers during 20X2.

a.
b.
c.
d.
e.
f.

$2,970
$3,030
$3,015
$2,985
$3,035
$2,965

19.

Compute the amount of Cash Paid for Insurance during 20X2.


a.
b.
c.
d.
e.
f.
g.

20.

$655
$670
$640
$625
$685
$615
$695
Compute the total CASH FROM OPERATING ACTIVITIES in 20X2.

a.
b.
c.
d.
e.
21.

$498 inflow
$340 inflow
$305 inflow
$345 inflow
$265 inflow
Compute the cash received from the sale of equipment in 20X2.

a.
b.
c.
d.
e.
f.
g.

22.

$0
$300
$265
$335
$100
$135
$65

Compute the total CASH FROM INVESTING ACTIVITIES in 20X2.


a.
b.
c.
d.
e.
f.
g.
h.

net outflow of $300


net inflow of $300
net outflow of $240
net inflow of $240
net outflow of $335
net inflow of $335
net outflow of $95
net inflow of $95

23. Compute the CASH PAID FOR DIVIDENDS in 20X2.


a.
b.
c.
d.
e.
f.
g.

$45
$235
$10
$65
$335
$345
$570

24.

Compute the total CASH FROM FINANCING ACTIVITIES in 20X2.


a.
b.
c.
d.
e.
f.
g.

net outflow of $355


net inflow of $40
net outflow of $400
net outflow of $360
net inflow of $350
net outflow of $320
net inflow of $320

25. The following data come from the financial statements of Tarazi Aina Company for 20X8.
Dividends declared and paid during the year...............................$65
Increase in the common stock account during the year...............100
Depreciation expense for the year..................................................40
Amount of old loans repaid during the year..................................32
Amount of new loans obtained during the year.............................15
Total cash OUTFLOW from financing activities for the year......90
What was the amount of cash paid by Tarazi Aina Company to repurchase shares of its own
stock during the year 20X8?
a.
b.
c.
d.
e.
f.
g.
h.
26.

$100
$90
$108
$155
$140
$78
$208
$46
Haan Corporation had the following cash flows during 20X3.

Cash receipt from the issuance of stock.....................................................$40,000


Cash received from customers......................................................................20,000
Interest received on long-term investments..................................................10,000
Cash paid for wages......................................................................................12,000
Cash paid for insurance..................................................................................1,000
Cash paid for dividends..................................................................................6,000
Cash paid to purchase building.....................................................................60,000
Cash paid to purchase land...........................................................................20,000
Using this information, compute Haan Companys FREE CASH FLOW.
a.
b.
c.
d.
e.
f.
g.

$80,000 outflow
$97,000 outflow
$63,000 outflow
$73,000 outflow
$69,000 outflow
$97,000 inflow
$17,000 inflow

The financial statement data below are for Company Z.

27.

Sales
Cost of goods sold
Depreciation expense
Net income

Income Statement
$700
(450)
(100)
$150

Accounts receivable
Inventory
Accounts payable

Balance Sheet
Ending
70
150
25

Beginning
100
220
10

Compute Company As OPERATING CASH FLOW for the year.


a.
b.
c.
d.
e.
f.
g.

28.

$250 inflow
$365 inflow
$225 inflow
$335 inflow
$305 inflow
$295 inflow
$350 inflow

The following computation of cash flow from operating activities is for Company Y. Note:
Company Y pays for all of its inventory purchases in cash meaning that the company has no
accounts payable.
Income Statement

Sales
Cost of Goods Sold
Wage Expense
Depreciation Expense
Net Income

Adjustments

$400
(250)
(100)
(30)
$20

Which ONE of the following statements is most likely to be TRUE?


a.
b.
c.
d.

Accounts Receivable DECREASED during the year.


Inventory DECREASED during the year.
Wages Payable INCREASED during the year.
Company Y paid $30 in cash for depreciation

-40
-50
+15
+30

Statement of Cash
Flows
+360
(300)
(85)
0
-25

29. Company X reported the following information for the year.


Cash from operating activities
Net income
Cash from financing activities
Total assets
Cash from investing activities

1,200 inflow
800
1,000 inflow
5,000
2,000 outflow

Compute Company Xs FREE CASH FLOW for the year.


a.
b.
c.
d.
e.
f.
g.

30.

$1,200 inflow
$1,000 inflow
$2,200 inflow
$2,000 outflow
$1,000 outflow
$800 outflow
$200 inflow

Company W reported its operating cash flow computation using the indirect method, as
follows.
Net income
Depreciation
Change in inventory
Change in accounts receivable
Cash flow from operating activities

800
1,000
(5,000)
7,000
3,800

Which ONE of the following statements is TRUE regarding Company W?


a.
b.
c.

Company W generated $7,000 in cash by allowing its accounts receivable to INCREASE.


Company W used $5,000 in cash by allowing its inventory to INCREASE.
Company W generated $1,000 in cash through depreciation.

Solutions
1.

solution B

2.

solution B

One way to get the correct answer:


Cost of goods sold
Increase in inventory
Increase in accounts payable
Cash paid for inventory

(500,000)
(15,000)
40,000
(475,000)

Another way to get the correct answer:


Beginning inventory
+ Purchases
- Ending inventory
Cost of goods sold

120,000
???
(135,000)
500,000

Purchases must be 515,000


Beginning accounts payable
- Cash payments
+ New purchases
Ending accounts payable

60,000
???
515,000
100,000

Cash payments must have been 475,000


3.

solution C

Net income
+ Depreciation expense
+ Accounts receivable decrease
- Prepaid rent increase
- Accounts payable decrease
Cash flow from operations

243,000
55,000
60,000
(40,000)
(45,000)
273,000

4.

solution D

This easiest way to do this one is to first compute net income and then to compute operating cash
flow using the indirect method

Sales
Wage Expense
Rent Expense
Depreciation expense
Net income
Computation of operating cash flow:
Net income
Plus depreciation expense
Plus accounts receivable decrease
Less prepaid rent increase
Less wages payable decrease
Cash flow from operations
5.

300,000
(120,000)
(75,000)
(37,500)
67,500

67,500
37,500
54,000
(33,000)
(39,000)
87,000

solution D

Collections on accounts receivable


Payments on inventory
Payments for wages and salaries
Income taxes paid
Utilities paid
Interest paid on note to local bank
Cash from operating activities

236,250
(168,750)
(78,750)
(27,000)
(6,750)
(5,625)
(50,625)

Depreciation expense of $22,500 is a non-cash expense and is ignored when computing operating cash
flow using the direct method.
The items below are NOT operating items:

Payments of dividends
Proceeds received from sale of equipment
Proceeds from issuance of common stock

11,250
225,000
56,250

6.

Solution D

Entries on the debit side of the accumulated depreciation account are associated with equipment that
has been sold. Entries to the credit side are associated with depreciation expense for the period.
Because we know depreciation expense for the period and we know the beginning and ending
balances in the account, we can infer the accumulated depreciation associated with the equipment
that was sold.
Accumulated Depreciation
$
2,000 Beginning Balance
800 Depreciation Expense
Sale of Equipment*
1,400
$
1,400 Ending Balance
*$1,400 = $2,000 + 800 - 1,400
Since we know the book value of the equipment sold, we can back into the historical cost of the
equipment sold. The sale of equipment decreases the PP&E account. Because we know the ending
and beginning balances and we know the historical cost of the equipment sold, the purchases of
equipment becomes the plug figure for the T-account to balance. (Purchases of equipment increase
PP&E.)
Property, Plant, & Equipment
Beginning Balance $
7,000
2,600 Sale of Equipment*
Purchases** $
3,000
Ending Balance $
7,400
*$2,600 = $1,200 book value + 1,400 accumulated depreciation
**$3,000 = $7,400 - 7,000 + 2,600
The following journal entry would have been made to record the sale of the equipment:
Cash
1,100
Accumulated Depreciation
1,400
Loss on Sale of Equipment
100
Property, Plant, & Equipment
2,600

7.

Solution C

The best way to solve for purchases is to create the T-accounts for Accumulated Depreciation and for
Property, Plant & Equipment. (As a side note, the fact that accumulated depreciation ending
balance and PP&E purchases are equal is coincidencethis will not always be the case!)
Accumulated Depreciation
$
50,000 Beginning Balance
2,000 Depreciation Expense
Sale of Equipment*
7,000
Sale of Equipment**
3,000
$
42,000 Ending Balance
* 7,000 = 9,000 historical cost - 2,000 book value
** 3,000 = 3,000 historical cost - 0 book value (fully depreciated)
(Note: The debits to accumulated depreciation could be netted to $10,000)
In this problem, depreciation expense is not given, but you can compute it using the other data given.
However, you dont need to compute depreciation expense to do the problem.
Property, Plant, & Equipment
Beginning Balance $
70,000
9,000 Sale of Equipment*
3,000 Sale of Equipment*
Purchases** $
42,000
Ending Balance $
100,000
*This number could be netted to $12,000
**42,000 = 100,000 - 70,000 + 9,000 + 3,000
8.

solution B

The best way to see where the solution comes from is by using T-accounts. Of all the accounts listed,
only Buildings and Land impact the net cash provided by investing activities.
Buildings
42,000
Purchases*

55,000

0 Buildings Sold

97,000
*55,000 = 97,000 - 42,000
Land
20,000
Purchases*

15,000
35,000
*15,000 = 35,000 - 20,000

Cash from Investing Activities:


Cash outflow to Purchase Buildings
Cash outflow to Purchase Land
Total Cash for Investing Activities

($55,000)
(15,000)
($70,000)

9.

solution C

The first thing to do is classify the various cash receipts and payments as operating, financing, or
investing cash flows.
Cash receipt or Cash Payment
Cash receipt from the issuance of stock,
Cash received from customers,
Interest received on long-term investments
Cash paid for wages
Cash paid for insurance
Cash paid for dividends
Cash paid to purchase building
Cash paid to purchase land

Amount
Classification
$
40,000
Financing
20,000
Operating
10,000
Operating
12,000
Operating
1,000
Operating
6,000
Financing
60,000
Investing
20,000
Investing

After the cash flows have been classified, the investing activities section of the cash flow statement
can be prepared as follows:
Investing Activities
Cash paid to purchase building
Cash paid to purchase land
Net cash flow for investing activities
10.
11.

$
$

(60,000)
(20,000)
(80,000)

solution F
solution A

We know that Owners Equity is composed of two componentscommon stock and retained
earnings. The retained earnings account can be further classified as net income minus dividends
paid. Thus, to find the correct answer, the Retained Earnings T-account should be used. Because
the beginning and ending balances and the net income are all given, the amount of dividends paid
becomes the plug figure to make the T-account balance.
Retained Earnings
$
250,000 Beg. Bal.
270,000 Net Income*
305,000
Dividends**
$
215,000 End. Bal.
* 270,000 = 690,000 - 420,000
** 305,000 = 270,000 + 250,000 - 215,000

12.

solution C

Beginning retained earnings


+ Net income
- Dividends
= Ending retained earnings

$64,034
+ 125,000
- ???
$95,561

Cash from financing activities:


Cash received from issuance of new shares ($51,005 - $39,682)
Cash received from new long-term loans ($18,967 - $15,437)

$11,323
3,530

Cash paid for dividends (see computations above)

(93,473)

TOTAL CASH FOR FINANCING ACTIVITIES

($78,620)

13.

solution B

14.

solution B

The following constitute financing activities for Chen Corporation:


Cash receipt from issuance of stock
$30,000
Cash paid for dividends
($4,500)
Total Cash from Financing Activities
$25,500

15.

solution C

Beginning retained earnings


+ Net income
- Dividends
= Ending retained earnings

$21,000
+ 40,000
- ???
$52,500

Retained Earnings
$ 21,000 Beg. Bal.
40,000 Net Income
8,500
Dividends Paid*
$ 52,500 End. Bal.
* 8,500 = 40,000 + 21,000 - 52,500

Cash from financing activities:


Cash received from issuance of new shares ($75,000 - $45,000)
Cash received from new long-term loans ($75,000 - $30,000)

$30,000
45,000

Cash paid for dividends (see computations above)

(8,500)

TOTAL CASH FOR FINANCING ACTIVITIES

66,500

16. solution A
Computation of net income:
Sales
Gain on sale of equipment
Interest revenue

$200,000
13,000
50,000
$263,000

Cost of goods sold


Insurance expense
Depreciation expense
Total expenses
Net income

$80,000
32,000
25,000
137,000
$126,000

Computation of cash flow from operating activities (Indirect Method):


Net income
$126,000
Plus depreciation
25,000
Less gain on sale of equipment
(13,000)
Plus inventory decrease
36,000
Plus prepaid insurance decrease
22,000
Less accounts payable increase
(18,000)
Less interest receivable increase
(26,000)
Cash flow from operating activities
$152,000
17.

solution D

Cost of goods sold


Decrease in inventory
Decrease in accounts payable
Total

(2,000)
45
(15)
(1,970)

18.

solution A

Sales
Increase in accounts receivable
Total
19.

3,000
(30)
2,970

solution G

Insurance expense
Increase in prepaid insurance
Total
20.

(655)
(40)
(695)

solution C

Income Statement Adjustments


Sales

$ 3,000

Gain on Sale of
Equipment
Cost of Goods Sold
Insurance Expense
Depreciation
Expense
Net Income
21.

35
(2,000)
(655)
(100)
$

280

Cash RECEIVED from sale of equipment

Gain on Sale of Equipment

(35)

+45
(15)
(40)
+100

(1,970)
(695)
0
+305

solution D

Sales price
- Book Value
(Cost - Accum Depr)

(30)

Statement of
Cash Flows
2,970

335
300
35

22.

solution H
Cash PAID to purchase new property, plant, and equipment
Cost must have been $340.
Book value = $300 = Cost Accumulated Depreciation
$300 = Cost - $0
Cost = $340

Property, Plant, and Equipment


-----------------------------------------------Begin
800 |
|
Historical cost of
PPE Purchases 240 | 340
old junk
-----------------------------------------------End
700 |
Cash received selling old equipment
Cash paid to purchase new PPE
Total

Accumulated Depreciation
------------------------------------------------| 240
Begin
Accum depr
|
on old junk
40 | 100
Depr Exp
------------------------------------------------| 300
End

335
(240)
95

23. solution A
Cash paid for dividends
Beginning retained earnings
+ Net income
- Cash dividends
= Ending retained earnings

$55
280
- ????
$290

Dividends were $45


24.

solution D

Repay loans
New paid-in capital
Dividends (see question 23)
Total

(355)
40
(45)
(360)

To check and see if questions 17 through 24 are consistent and match up with the change in cash.
Operating
Investing
Financing
Total increase in cash
perfect

305
95
(360)
40

25.

solution C

There are only five potential financial activities


1.
Amount received through new borrowing..........................................................15
2.
Amount paid to repaid old loans........................................................................(32)
3.
Amount received from new stockholder investment.......................................100
4.
Amount paid for cash dividends.........................................................................(65)
5.
Amount paid to repurchase shares of stock..................................................?????
Total cash from financing activities..............................................................................(90)
Amount paid to repurchase shares of stock = (108)
26.

solution C

The first thing to do is classify the various cash receipts and payments as operating, financing, or
investing cash flows.
Cash receipt or Cash Payment
Cash receipt from the issuance of stock,
Cash received from customers,
Interest received on long-term investments
Cash paid for wages
Cash paid for insurance
Cash paid for dividends
Cash paid to purchase building
Cash paid to purchase land

Amount
Classification
40,000
Financing
20,000
Operating
10,000
Operating
12,000
Operating
1,000
Operating
6,000
Financing
60,000
Investing
20,000
Investing

After the cash flows have been classified, the operating and investing activities sections of the cash
flow statement can be prepared as follows:
Operating Activities
Cash received from customers
Interest received on long-term investments
Cash paid for wages
Cash paid for insurance
Net cash flow from operating activities
Investing Activities
Cash paid to purchase building
Cash paid to purchase land
Net cash flow for investing activities

$20,000
10,000
(12,000)
(1,000)
$17,000

$
$

(60,000)
(20,000)
(80,000)

FREE CASH FLOW = Operating cash flow plus investing cash flow
$17,000 - $80,000 = $63,000 outflow

27. solution B
Income Statement
Sales
Cost of Goods Sold

$700
(450)

Depreciation Expense
Net Income

(100)
$150

28.

Adjustments
+30
+70
+15
+100

Statement of Cash
Flows
+730
(365)

solution C

An accounts receivable DECREASE would create an increase in cash flow. The matrix shows -40.
An inventory DECREASE would create an increase in cash flow. The matrix shows -50.
A wages payable INCREASE would create an increase in cash flow. The matrix shows +15, so this is
correct.
29.

solution F

FREE CASH FLOW = Operating cash flow plus investing cash flow
$1,200 inflow + $2,000 outflow = $800 outflow

30.

solution B

The (5,000) associated with the change in inventory means that the inventory
INCREASED, using more cash.
The 7,000 associated with the change in accounts receivable means that the accounts
receivable DECREASED, generating extra cash.
Depreciation does NOT create cash.

0
+365