Second Mid Term Sample II

1) The basic format of an income statement is

A) Sales - Expenses = Profits.
B) Income - Expenses = EBIT.
C) Sales - Liabilities = Profits.
D) Assets - Liabilities = Profits.
Answer: A

2) Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of
Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses =
$150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000.
Li's operating income is equal to
A) $770,000.
B) $1,070,000.
C) $1,100,000.
D) $1,500,000.
Answer: C
Keywords: Operating Income, EBIT
Explanation: Sales - Cost of Goods Sold - Depreciation Expense - Administrative Expenses Marketing Expenses = EBIT = $3,000,000 - 1,500,000 - 170,000 - 150,000 - 80,000 =
$1,100,000
AACSB: Analytic skills
3) Which of the following represents an attempt to measure the net results of the firm's
operations (revenues versus expenses) over a given time period?
A) Balance Sheet
B) Statement of Cash Flows
C) Income Statement
D) Sources and Uses of Funds Statement
Answer: C
4) PDQ Corp. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total
operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax
rate is 40%. What is PDQ's net income?
A) $288,000
B) $350,000
C) $377,000
D) $390,000
Answer: D
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Answer:
Operating income (EBIT)= sales COG Depreciation operating expense = 4,000,000
2,500,000 600,000 = 900,000. Note there is no depreciation.
EBIT Interest Tax = NI. (EBIT interest = EBT, EBT Tax = NI)
Interest = 250,000, EBIT interest = 900,000 250,000 = 650,000 = EBT (taxable income).
EBT *(1-40%) = EBT tax = NI NI = 650,000*(1-40%) = 390,000
5) Which of the following accounts belong in the liability section of a balance sheet?
A) interest expense
B) accumulated depreciation
C) accounts payable
D) preferred stock
Answer: C

6) All of the following are equity accounts on a balance sheet except:

A) retained earnings.
B) cash.
C) common stock.
D) paid-in capital.
Answer: B

7) The two principal sources of financing for corporations are

A) debt and accounts payable.
B) debt and equity.
C) common equity and preferred equity.
D) cash and common equity.
Answer: B
8) Net working capital is equal to
A) total assets minus total liabilities.
B) current assets minus total liabilities.
C) total operating capital minus net income.
D) current assets minus current liabilities.
Answer: D
9) All of the following are income statement items except:
A) accrued expenses.
B) depreciation expense.
C) cost of goods sold.
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D) interest expense.
Answer: A
10) Which of the following accounts belongs on the asset side of a balance sheet?
A) depreciation expense
B) accounts payable
C) inventory
D) accruals
Answer: C

11) Baron, Inc. has total current assets of $1,200,000; long-term debt of $600,000; total current
liabilities of $500,000; and long-term assets of $800,000. How much is the firm's net working
capital?
A) $1,000,000
B) $900,000
C) $600,000
D) $700,000
Answer: D
Answer:
NWC=CA-CL ; CA=1,200,000
CL = 500,000, so NWC = 1,200,000 500,000 = 700,000
12) A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%,
depreciation expense of $200,000, and a tax rate of 40%. The corporation's total stockholders'
equity is equal to
A) $5,600,000.
B) $2,800,000.
C) $2,400,000.
D) $1,800,000.
Answer: C
Explanation: 1 - debt ratio = the percentage of assets that equals common equity, so common
equity = 60% times $4 million or $2.4 million

13) Use the following information to calculate the change in the company's cash balance for the
year.
Credit Sales
Cash Sales
Operating Expenses on Credit
Cash Operating Expenses
Accounts Receivable (Beg. of

$800,000
$500,000
$200,000
$700,000
$50,000
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Year)
Accounts Receivable (End of Year) $80,000
Accounts Payable (Beg. of Year) $50,000
Accounts Payable (End of Year) $100,000
Income Taxes Paid
$160,000
A) $145,000
B) $180,000
C) $260,000
D) $365,000
Answer: C
Explanation: Cash Sales of $500,000 plus Credit Sales Collected of $770,000 [$800,000 minus
increase in accounts receivable of $30,000] minus Cash Operating Expenses of $700,000 minus
Credit Operating Expenses Paid of $150,000 [$200,000 minus the increase in accounts payable
of $50,000] minus Income Taxes Paid of $160,000 = $260,000
AACSB: Analytic skills

14) Examples of uses of cash include

A) paying cash dividends to stockholders.
B) borrowing an additional amount using a secured loan.
C) selling machinery.
D) all of the above
Answer: A
Use of cash: cash outflow, so A. All others are cash inflow.
15) Baron, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; and
long-term assets of $800,000. How much is the firm's Total Liabilities & Equity?
A) $2,500,000
B) $1,300,000
C) $2,000,000
D) $1,800,000
Answer: C
Answer:
A=L+E, So if we can find A, then L+E is known.
TA = CA + long term asset = 1,200,000 + 800,000 = 2,000,000
16) Benkart Corporation has sales of $5,000,000, net income of $800,000, total assets of
$2,000,000, and 100,000 shares of common stock outstanding. If Benkart's P/E ratio is 12, what
is the company's current stock price?
A) $60 per share
B) $96 per share
C) $240 per share
D) $360 per share
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Answer: B
Answer:
P/E= Price / EPS=12, EPS=NI/# of shares.
NI=800,000, # of shares = 100,000, so EPS = 8000,000 / 100,000 = 8
EPS=8 and P/E=12, so price = 96.

17) Acme Incorporated has a debt ratio of .42, noncurrent liabilities of $20,000 and total assets of
$70,000. What is Acme's level of current liabilities?
A) $8,400
B) $9,400
C) $12,348
D) $10,600
Answer: B
Answer:
Debt ratio = TD/TA = 0.42, TA=70,000 TD / 70,000 = 0.42, so TD = 70,000 *0.42 =29,400.
So CL= TD noncurrent liability = 29,400 20,000 = 9,400