Achievement Test 7: Chapters 13-14 Name ___________________________

Managerial Accounting, 6e Instructor ________________________

Section # _________ Date __________

Part I II III IV V Total

Points 28 27 10 10 25 100

Score

PART I MULTIPLE CHOICE (28 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Mason Mowers had inventory of $420,000 and $444,000 on December 31, 2013, and
December 31, 2014, respectively. Cost of goods sold for 2014 was $2,613,600. For
what time period does Mason Mowers hold its inventory, on average before selling it?
a. 6.1 days
b. 60.3 days
c. 5.8 days
d. 62 days

____ 2. Which of the following statements is true?

a. The price-earnings ratio is a long-term solvency ratio.
b. High asset turnover is a sign of efficient use of assets.
c. The payout ratio measures the profitability of the owners' investment.
d. The acid-test ratio applies to manufacturing companies, but not to service or
retailing businesses.

____ 3. Fane Consulting sold office equipment which resulted in a loss on the sale. Which
activities are affected by this transaction?
a. Operating and investing activities
b. Operating and financing activities
c. Financing and investing activities
d. Operating, financing, and investing activities

____ 4. One major purpose of the statement of cash flows is to provide information about
a. the firm's profitability.
b. the firm's cash receipts and payments during a period.
c. the firm's resources and claims against those resources.
d. changes in retained earnings.

____ 5. Cash provided by operating activities

a. may be larger than net income.
b. equals the change in cash for the year.
c. summarizes cash flows relating to the purchase and sale of long-lived assets.
d. decreases when long-term debt is repaid.
AT7- 2 Test Bank for Managerial Accounting, Sixth Edition

____ 6. Traynham Produce reported equipment at $120,000, and $25,700 accumulated

depreciation on its December 31, 2013, balance sheet. During 2014, the company
purchased equipment costing $32,000 and sold equipment costing $15,000 (book
value $11,300) for $2,000. On December 31, 2014, net equipment was $104,800.
Using the indirect method, how much depreciation expense will be added in the
operating activities sections of Trayhnams statement of cash flows for 2014?
a. $32,200
b. $14,400
c. $17,800
d. $10,200

____ 7. Which one of the following is a short-term liquidity ratio?

a. Profit margin ratio
b. Payout ratio
c. Debt to total assets ratio
d. Acid-test ratio

____ 8. Team Gear reported sales of $854,000, total assets of $420,000, total stockholders'
equity of $220,000, current assets of $125,000, current liabilities of $43,000, and cash
of $50,400. In a common size balance sheet, at what amount would Cash be shown?
a. 50.4%
b. 12.0%
c. 5.9%
d. 40.3%

____ 9. The use of common size financial statements is an example of

a. ratio analysis.
b. vertical analysis.
c. liquidity analysis.
d. horizontal analysis.

____ 10. How should the purchase of an office building by issuing long-term notes payable be
reported?
a. Cash outflow in the financing section of the statement of cash flows
b. Cash outflow in the investing section of the statement of cash flows
c. Cash outflow in the operating section of the statement of cash flows
d. Noncash investing and financing activity

____ 11. For which of the following is a low ratio an indicator of good financial health?
a. Asset turnover ratio
b. Return on assets ratio
c. Acid-test ratio
d. Debt to total assets ratio

____ 12*. When using the direct method to compute cash provided by operations,
a. income taxes paid may be ignored.
b. depreciation expense is added to net income.
c. decreases in inventory are added to total operating expenses to compute cash
payments for operating expenses.
d. increases in accounts receivable are subtracted from total sales to compute cash
receipts from customers.
 Achievement Test 7 AT7- 3

____ 13. Which item is not reported on the income statement?

a. Unrealized gain on available-for-sale securities
b. Extraordinary loss due to volcano eruption damage
c. Gain from the disposal of a division
d. Interest expense

____ 14. Which cash flow activities result in the same reported amounts if the statement of cash
flows is prepared using the indirect method compared to the direct method?
a. Investing and financing activities
b. Operating and financing activities
c. Financing and operating activities
d. Operating, investing, and financing activities

PART II RATIO ANALYSIS (27 points)

Financial statements for Advantage Corporation are presented below.

ADVANTAGE CORPORATION
Comparative Balance Sheet
December 31
2014 2013
Assets
Cash................................................................................................ $ 8,000 $ 12,000
Accounts receivable (net)................................................................ 64,000 48,000
Inventory......................................................................................... 40,000 36,000
Land................................................................................................ 24,000 16,000
Machinery........................................................................................ 124,000 96,000
Accumulated depreciation............................................................... (40,000) (28,000)
Total assets............................................................................... $220,000 $180,000

Liabilities and Stockholders' Equity

Accounts payable............................................................................ $ 40,000 $32,000
Long-term notes payable................................................................. 70,000 58,000
Common stock ($2 par value)......................................................... 80,000 80,000
Retained earnings........................................................................... 30,000 10,000
Total liabilities and stockholders' equity..................................... $220,000 $180,000

ADVANTAGE CORPORATION
Income Statement
For the year ended December 31, 2014

Sales................................................................................................................. $720,000
Less: Sales returns and allowances.................................................................. 20,000
Net sales........................................................................................................... $700,000
Cost of goods sold............................................................................................ 550,000
Gross profit....................................................................................................... 150,000
Selling expenses............................................................................................... 42,000
Administrative expenses................................................................................... 28,000
Income before income taxes............................................................................. 80,000
Income tax expense.......................................................................................... 24,000
Net income....................................................................................................... $ 56,000
AT7- 4 Test Bank for Managerial Accounting, Sixth Edition

Additional Information: All sales were on account. Cash dividends were declared and paid during
2014. The market price of Advantage's common stock was $25 on December 31, 2013, and $28
on December 31, 2014.

Instructions: Compute the indicated ratios at December 31, 2014, or for the year ended
December 31, 2014, as appropriate. Report answers to one decimal place.

1. Return on assets __________________________________________________________.

2. Acid-test ratio _____________________________________________________________.

3. Profit margin ______________________________________________________________.

4. Payout ratio _______________________________________________________________.

5. Debt to total assets ratio ____________________________________________________.

6. Asset turnover ____________________________________________________________.

7. Receivables turnover _______________________________________________________.

8. Price-earnings ratio ________________________________________________________.

9. Current ratio ______________________________________________________________.

 Achievement Test 7 AT7- 5

PART III STATEMENT OF CASH FLOWS CLASSIFICATIONS (10 points)

Instructions: Each of the events below may have an effect on the statement of cash flows.
Designate how the event should be reported within the statement of cash flows using the codes
provided below. Codes may be used more than once, or not at all.

Codes
A. Investing activity; cash inflow
B. Investing activity; cash outflow
C. Financing activity; cash inflow
D. Financing activity; cash outflow
E. Operating activity; cash inflow
F. Operating activity; cash outflow
G. Noncash investing and financing activity

Events

_____ 1. Issued checks for the weekly payroll

_____ 2. Paid an account payable

_____ 3. Issued notes payable for cash

_____ 4. Declared and paid a cash dividend

_____ 5. Paid cash for a new delivery truck

_____ 6. Purchased treasury stock for cash

_____ 7. Paid cash for 12% interest in another company

_____ 8. Received interest on a long-term note receivable

_____ 9. Converted bonds payable into common stock

_____ 10. Received cash proceeds from the sale of equipment at book value
AT7- 6 Test Bank for Managerial Accounting, Sixth Edition

PART IV IRREGULAR ITEMS (10 Points)

Acousta, Inc. is located in Kansas. It provides the following results of transactions which occurred
during the year:

A hurricane damaged a warehouse destroying the inventory and the building. The
cost of the building was $800,000, its book value was $480,000, and the insurance
company reimbursed the company $390,000. Hurricanes are not common in
Kansas.
The company disposed on its Western division during the year. The loss during the
year from the Western Division was $250,000. The company experienced a gain
on disposal of the assets of the Western Division in the amount of $140,000.
Income from continuing operations totaled $178,000 during the year.
The company experienced an unrealized gain in value on its available-for-sale
securities in the amount of $20,000.

The companys income tax rate is 30%.

Instructions: Prepare a partial income statement beginning with income from continuing
operations for the year. For any transaction listed above that you do not include on the income
statement, indicate where it will be reported.
 Achievement Test 7 AT7- 7

PART V STATEMENT OF CASH FLOWS Indirect Method (25 Points)

Condensed financial data for Back Yard Depot are given below.

BACK YARD DEPOT

Comparative Balance Sheet
December 31
Assets
2014 2013
Cash $ 68,000 $ 20,000
Accounts receivable 39,000 27,000
Inventory 100,000 115,000
Land 720,000 650,000
Equipment 493,000 458,000
Accumulated depreciation (40,000) (20,000)
Total assets $1,380,000 $1,250,000

Liabilities and Stockholders' Equity

Accounts payable $ 52,000 $ 12,000
Accrued expenses payable 21,000 24,000
Bonds payable 575,000 575,000
Common stock 674,000 604,000
Retained earnings 58,000 35,000
Total liabilities and stockholders equity $1,380,000 $1,250,000

Additional information for 2014:

1. A cash dividend of $15,000 was declared and paid during the year.
2. Additional equipment was purchased for cash.
3. Land was acquired by issuing common stock.

Instructions: Prepare a statement of cash flows for 2014 using the indirect method.
AT7- 8 Test Bank for Managerial Accounting, Sixth Edition

Solutions Achievement Test 7: Chapters 13-14

PART I MULTIPLE CHOICE (28 points)

1. A 6. D 11. D
2. B 7. D 12. D
3. A 8. B 13. A
4. B 9. B 14. D
5. A 10. D

PART II RATIO ANALYSIS (27 points)

1. $56,000 [($220,000 + $180,000) 2] = 28.0%
2. ($8,000 + $64,000) $40,000 = 1.8 : 1
3. $56,000 $700,000 = 8.0%
4. Dividends: $10,000 + $56,000 - $30,000 = $36,000
$36,000 $56,000 = 64.3%
5. ($40,000 + $70,000) $220,000 = 50.0%
6. $700,000 (($220,000 + $180,000) 2) = 3.5 times
7. $700,000 (($64,000 + $48,000) 2) = 12.5 times
8. Number of shares: $80,000 $2 par value = 40,000 shares
Earnings per share: $56,000 40,000 = $1.40 per share
$28 $1.40 = 20.0 times
9. ($8,000 + $64,000 + $40,000) $40,000 = 2.8 : 1

PART III STATEMENT OF CASH FLOWS CLASSIFICATIONS (10 points)

1. F 6. D
2. F 7. B
3. C 8. E
4. D 9. G
5. B 10. A

PART IV IRREGULAR ITEMS Indirect Method (10 points)

Income from continuing operations $178,000

Discontinued operations:
Loss from operations of Western Division, net of $75,000 tax savings $(175,000)
Gain on disposal of Western Division, net of $42,000 income taxes 98,000 (77,000)
Income before extraordinary item 101,000
Extraordinary loss due to hurricane, net of $27,000 tax savings (63,000)
Net income $ 38,000

The unrealized gain on available-for-sale securities in the amount of $20,000 is reported as part
of comprehensive income.
 Achievement Test 7 AT7- 9

PART V STATEMENT OF CASH FLOWS Indirect Method (25 points)

Net income = $35,000 + NI - $15,000 = $58,000

Net income = $38,000
ADVANTAGE CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income $ 38,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation expense $20,000
Increase in accounts receivable (12,000)
Decrease in inventory 15,000
Increase in accounts payable 40,000
Decrease in accrued expenses payable (3,000) 60,000
Net cash provided by operating activities 98,000
Cash flows from investing activities
Purchase of equipment (35,000)
Net cash used by investing activities (35,000)
Cash flows from financing activities
Payment of dividends (15,000)
Net cash used by financing activities (15,000)
Net increase in cash 48,000
Cash at beginning of period 20,000
Cash at end of period $68,000
Noncash investing and financing activities
Land was acquired by issuing common stock $70,000