Schweser Printable Answers - cash flows balance sheetTest ID#: 1Top of Form

Bottom of FormTop of Form

Bottom of Form

Question 1 - #97792 Selected information from Gerrard, Inc.s financial activities in the most recent year was as follows: Net income was $330,000. The tax rate was 40%. 700,000 shares of common stock were outstanding on January 1. The average market price per share for the year was $6. Dividends were paid during the year. 2,000 shares of 8% $500 par value preferred shares, convertible into common shares at a rate of 200 common shares for each preferred share, were outstanding for the entire year. 200,000 shares of common stock were issued on March 1. Gerrard, Inc.s diluted earnings per share (diluted EPS) was closest to:A)$0.289.

B)$0.261.

C)$0.197.

Your answer: A was incorrect. The correct answer was B) $0.261. To compute Gerrards basic earnings per share (EPS) ((net income preferred dividends) / weighted average common shares outstanding), the weighted average common shares outstanding must be computed. 700,000 shares were outstanding from January 1, and 200,000 shares were issued on March 1, so the weighted average is 700,000 + (200,000 10 / 12) = 866,667. Basic EPS was $330,000 (2,000 $500 0.08)) / 866,667 = $0.289.If the convertible preferred shares were converted to common stock, 2,000 200 = 400,000 additional common shares would have been issued and dividends on the preferred stock would not have been paid. Diluted EPS was $330,000 / (866,667 + 400,000) = $0.261. This question tested from Session 8, Reading 25, LOS h.

Question 2 - #97992 An analyst has gathered the following information about Zany Corp. Net income of $200,000 for the year ended December 31, 2004. During 2004, 50,000 common shares were outstanding. Zany has 10,000 shares of 7%, $50 par convertible preferred stock outstanding, each convertible into two shares of common. 5,000 warrants are outstanding with an exercise price of $24. Each warrant is convertible into one common share. The average market price per common share during 2004 was $20. Calculate Zany's basic and diluted earnings per share (EPS) for 2004.Basic EPSDiluted EPS

A)$3.30$2.86

B)$3.30$2.00

C)$4.00$2.86

Your answer: A was correct! Basic EPS = (net income preferred dividends) / number of common shares = (200,000 35,000) / 50,000 = $3.30 per shareThe preferred shares are converted into 20,000 common shares, the firm does not pay preferred dividends. Diluted EPS = 200,000 / (50,000 + 20,000) = $2.86 per share. The warrants are out of the money at a stock price of $20.This question tested from Session 8, Reading 25, LOS h.

Question 3 - #97421 An analyst contemplates using the indirect methods to create the projected statement of cash flows. She decides to research the differences between the direct and indirect methods. Which of the following statements is most accurate? Under the:A)direct method, depreciation must be added to cash collections because it is a non-cash expense.

B)indirect method, changes in accounts receivable are already included in the net income figure.

C)indirect method, depreciation must be added to net income, because it is a non-cash expense.

Your answer: A was incorrect. The correct answer was C) indirect method, depreciation must be added to net income, because it is a non-cash expense. The indirect method begins with net income, which has already included all cash and non-cash expenses. Therefore, under the indirect method, depreciation must be added to net income, because it is a non-cash expense. This question tested from Session 8, Reading 27, LOS f.

Question 4 - #97921 Goldstar Manufacturing has an accounts receivable turnover of 10.5 times, an inventory turnover of 4 times, and payables turnover of 8 times. What is Goldstars cash conversion cycle? A)80.38 days.

B)6.50 days.

C)171.64 days.

Your answer: A was correct! The cash conversion cycle = average receivables collection period + average inventory processing period payables payment period. The average receivables collection period = 365 / average receivables turnover or 365 / 10.5 = 34.76. The average inventory processing period = 365 / inventory turnover or 365 / 4 = 91.25. The payables payment period = 365 / payables turnover ratio = 365 / 8 = 45.63. Putting it all together: cash conversion cycle = 34.76 + 91.25 45.63 = 80.38. This question tested from Session 8, Reading 28, LOS b.

Question 5 - #98026 The All Faiths church is building a new church for $2 million on land acquired several years ago. The contractor estimates the cost at $1.3 million and the project is to be completed over a 2-year period with the payments split evenly between the 2 years. During the first year, the total costs incurred were $700,000. During the second year the contractor experienced cost overruns and costs incurred were $1.0 million. Using the percentage-of-completion method, how much revenue and income should the contractor recognize in the second year of the project?RevenueIncome

A)$923,077 -$76,923

B)$1,076,923$376,923

C)$1,000,000 $0

Your answer: A was correct! During the first year, the revenue was 700,000 / 1,300,000 2,000,000 = 1,076,923The total revenue for both years = $2,000,000 The second year revenue was 2,000,000 1,076,923 = $923,077The second year income = revenues costs = 923,077 1,000,000 = $-76,923 This question tested from Session 8, Reading 25, LOS c.

Question 6 - #97387 Juniper Corp. has the following transactions in 20X5. Junipers equipment with a book value of $55,000 was sold for $85,000 cash. A parcel of land was purchased for $100,000 worth of Juniper common stock. ABC company paid Juniper preferred dividends of $40,000. Juniper declared and paid a $100,000 cash dividend. Under U.S. GAAP, what is cash flow from financing (CFF) for Juniper for 20X5?A)$60,000.

B)$115,000.

C)$100,000.

Your answer: A was incorrect. The correct answer was C) $100,000. The only item involving cash flow from financing (CFF) was the payment of a cash dividend by Juniper. The sale of equipment affects cash flow from investing (CFI), the purchase of land has no effect on cash, and the preferred dividends received are cash flow from operations under U.S. GAAP. This question tested from Session 8, Reading 27, LOS f.

Question 7 - #97893 Nichols Companys net income for 20X6 was $978,000 with 1,250,000 shares outstanding. The average share price in 20X6 was $8.50. Nichols issued 2,000 warrants to purchase 100 shares each for $10 per share in 20X5. Nichols Companys diluted earnings per share (diluted EPS) for 20X6 is closest to: A)$0.782.

B)$0.777.

C)$0.793.

Your answer: A was correct! Nichols basic EPS (net income / weighted average common shares outstanding) was:$978,000 / 1,250,000 = $0.782.Because the exercise price of the warrants is higher than the average share price, the warrants are antidilutive and are excluded from diluted EPS. Because there were no other potentially dilutive securities, Nichols' diluted EPS in 20X6 is the same as basic EPS. This question tested from Session 8, Reading 25, LOS h.

Question 8 - #98044 Which of the following statements regarding the methods of revenue recognition is most accurate? In the first year of a long-term contract:A)the completed contract method is used when the selling price or cost estimates are unreliable.

B)the percentage-of-completion method generally results in lower retained earnings than the completed contract method.

C)the completed contract method, in comparison to the percentage-of-completion method, will generally result in higher net income.

Your answer: A was correct! The completed contract method compared to the percentage-of-completion method will result in lower net income in the first year because revenue and profit are recognized later. Hence, retained earnings will also be lower than the percentage-of-completion method.This question tested from Session 8, Reading 25, LOS b.

Question 9 - #95965 Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below: Cash from sale of truck of $7,000. Cash salaries paid of $17,000. Cash from customers of $45,000. Depreciation expense of $5,500. Interest on bank line of credit of $1,000. Cash paid to suppliers of $22,000. Other cash expenses, including rent, of $6,300. No taxes due. Using this information, what is the cash flow from operations for the month?A)-$1,300.

B)$11,200.

C)-$300.

Your answer: A was correct! The format of the question information suggests the use of the direct cash flow method. In this method, depreciation is not a component of cash flow from operations. Cash flow from operations = (all numbers in thousands of dollars) 45 17 22 6.3 1.0 = -1.3, or -$1,300. This question tested from Session 8, Reading 27, LOS a.

Question 10 - #97439 An analyst has gathered the following information about a company:Income Statement for the Year

Sales$1,500

Expenses

COGS$1,300

Depreciation20

Goodwill10

Int. Expenses40

Total expenses1,370

Income from cont. op.130

Gain on sale30

Income before tax160

Income tax64

Net Income$96

Additional Information:

Dividends paid $30

Common stock issued 20

Equipment purchased 50

Bonds issued 80

Fixed asset sold for(original cost of $100 with accumulated depreciation of $70) 60

Accounts receivable decreased by 30

Inventory decreased by 20

Accounts payable increased by 20

Wages payable decreased by 10

What is the cash flow from financing?A)$110.

B)$130.

C)$70.

Your answer: A was incorrect. The correct answer was C) $70. Dividends paid-$30

Stock issued20

Bonds issued80

CFF$70

This question tested from Session 8, Reading 27, LOS f.

Question 11 - #98013 Which of the following items regarding the corporate income statement is most accurate? A)Examples of extraordinary items include expropriations of property and equipment by foreign governments, losses from earthquakes and tornados, and gains from the sale of investments in subsidiaries.

B)If a corporation disposes of a business segment that is separable from the company's core business activities, the results of the discontinued segment are reported as a separate line item below income from continuing operations on a pre-tax basis.

C)Unusual or infrequent items appear in the income statement of a corporation as a component of net income from continuing operations.

Your answer: A was incorrect. The correct answer was C) Unusual or infrequent items appear in the income statement of a corporation as a component of net income from continuing operations. Explanations for incorrect answers are as follows: The gain on the sale of a subsidiary is an unusual or infrequent item. The results of a discontinued segment are reported below the line, net of tax (after tax). This question tested from Session 8, Reading 25, LOS e.

Question 12 - #97915 A firms financial statements reflect the following: EBIT $2,000,000

Sales $16,000,000

Interest expense $900,000

Total assets $18,400,000

Equity $7,000,000

Effective tax rate 35%

Dividend rate 28%

Current liabilities $1,400,000

Based on this information and assuming that the firms debt has a cost of 9% and has been outstanding for a full year, what is the firms total debt ratio and interest coverage ratio? Total Debt RatioInterest Coverage Ratio

A)0.622.22

B)0.901.80

C)0.700.96

Your answer: A was correct! The total debt ratio = ($18.4m 7.0m) / ($18.4m) or 0.62. The interest coverage ratio = $2,000,000 / $900,000 = 2.22. This question tested from Session 8, Reading 28, LOS b.

Question 13 - #97954 A firm has had the following numbers of shares outstanding during the year: Beginning of year 10,000,000 shares

Issued on April 1 500,000 shares

Split 2 for 1 on July 1

Issued on October 1 100,000 shares

Split 2 for 1 on December 31

Based on this information, what is the weighted number of shares outstanding for the year?A)42,400,000.

B)41,550,000.

C)20,780,000.

Your answer: A was incorrect. The correct answer was B) 41,550,000. Outstanding all year 10,000,000 2 2 1 40,000,000

Outstanding for 0.75 years 500,000 2 2 0.75 1,500,000

Outstanding for 0.25 years 100,000 2 0.25 50,000

Weighted average number of shares for year: 41,550,000

This question tested from Session 8, Reading 25, LOS g.

Question 14 - #97389 Selected information from Rockway, Inc.s U.S. GAAP financial statements for the year ended December 31, included the following (in $):20042005

Sales17,000,00021,000,000

Cost of Goods Sold11,000,00015,000,000

Interest Paid800,0001,000,000

Current Income Taxes Paid700,0001,000,000

Accounts Receivable3,000,0002,500,000

Inventory2,400,0003,000,000

Property, Plant & Equip. 2,000,00016,000,000

Accounts Payable1,000,0001,400,000

Long-term Debt8,000,0009,000,000

Common Stock4,000,0005,000,000

Using the direct method, cash provided or used by operating activities(CFO) in the year 2005 was:A)$5,300,000.

B)$6,300,000.

C)$4,300,000.

Your answer: A was incorrect. The correct answer was C) $4,300,000. Cash provided or used by operating activities under the direct method is computed by adding cash inflows and subtracting cash inputs and cash outflows. Operating Cash inflows for Rockway Inc. for 2005 came from sales ($21,000,000) and decrease in accounts receivable ($3,000,000 $2,500,000 = $500,000) for net cash inflows of ($21,000,000 + $500,000 =) $21,500,000. Operating cash inputs were cost of goods sold ($15,000,000), plus the increase in inventory ($3,000,000 $2,400,000 = $600,000) less the increase in accounts payable, (which is a source of funds) ($1,000,000 $1,400,000 = -$400,000) for net cash inputs of ($15,000,000 + $600,000 - $400,000 =) $15,200,000. Other operating cash outflows were interest paid ($1,000,000) and current income taxes paid ($1,000,000) totaling ($2,000,000). Cash provided by operations was ($21,500,000 $15,200,000 $2,000,000 =) $4,300,000. Changes in property, plant and equipment, long-term debt and common stock do not affect cash from operations. This question tested from Session 8, Reading 27, LOS f.

Question 15 - #98034 Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to eliminate insect infestation. Customers are required to prepay for the service at the beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost of performing the service, what is the most likely effect on the firms liabilities and equity compared to the correct treatment? Liabilities Equity

A)Overstated Overstated

B)Overstated Understated

C)Understated Overstated

Your answer: A was incorrect. The correct answer was C) Understated Overstated

When payment is received, the firm has an obligation to provide the service. This obligation is reported as a liability unearned revenue as a liability, offsetting the increase in cash. If they book the revenue and estimated expenses of providing the service this will overstate equity (assuming revenue greater than expected expense) and liabilities will be understated. This question tested from Session 8, Reading 26, LOS g.

Question 16 - #119453 How would the collection of accounts receivable most likely affect the current and cash ratios? Current ratio Cash ratio

A)IncreaseIncrease

B)No effectNo effect

C)No effectIncrease

Your answer: A was incorrect. The correct answer was C) No effectIncrease

Collecting receivables increases cash and decreases accounts receivable. Thus, current assets do not change and the current ratio is unaffected. Because the numerator of the cash ratio only includes cash and marketable securities, collecting accounts receivable increases the cash ratio. This question tested from Session 8, Reading 28, LOS b.

Question 17 - #97760 Selected information from Feder Corp.s financial activities for the year is as follows: Net income was $7,650,000. 1,100,000 shares of common stock were outstanding on January 1. The average market price per share was $62. Dividends were paid during the year. The tax rate was 40%. 10,000 shares of 6% $1,000 par value preferred shares convertible into common shares at a rate of 20 common shares for each preferred share were outstanding for the entire year. 70,000 options, which allow the holder to purchase 10 shares of common stock at an exercise price of $50 per common share, were outstanding the entire year. Feder Corp.s diluted earnings per share (EPS) was closest to:A)$5.87.

B)$5.32.

C)$4.91.

Your answer: A was incorrect. The correct answer was B) $5.32. Feders basic earnings per share ((net income preferred dividends) / weighted average shares outstanding) was (($7,650,000 ($1,000 10,000 0.06)) / 1,100,000 =) $6.41.If the convertible preferred stock was converted to common stock at January 1, (10,000 20 =) 200,000 additional common shares would have been issued, dividends on the preferred stock would not have been paid, and Diluted EPS would have been ($7,650,000 / (1,100,000 + 200,000) = $5.88. Because $5.88 is less than basic EPS of $6.41, the preferred shares are dilutive.Using the treasury stock method, if the options were exercised cash inflow would be (70,000 10 $50 =) $35,000,000. The number of Feder shares that can be purchased with the inflow (cash inflow divided by the average share price) is ($35,000,000 / $62 =) 564,516.The number of shares that would have been created is (700,000 564,516 =) 135,484. Diluted EPS was ($7,650,000 / (1,100,000 + 135,484) =) $6.19. Because this is less than the EPS of $6.41, the options are dilutive.Combining the calculations, Diluted EPS was (($7,650,000) / (1,100,000 + 200,000 + 135,484) = $5.32.This question tested from Session 8, Reading 25, LOS h.

Question 18 - #98081 The following data pertains to the Megatron company: Net income equals $15,000. 5,000 shares of common stock issued on January 1. 10% stock dividend issued on June 1. 1000 shares of common stock were repurchased on July 1. 1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year. How many common shares should be used in computing the companys basic earnings per share (EPS)?A)4,500.

B)5,000.

C)5,500.

Your answer: A was incorrect. The correct answer was B) 5,000. 1/1 5,500 shares issued (includes 10% stock dividend on 6/1) 12 = 66,0007/1 1,000 shares repurchased 6 months = 6,00066,000 6,000 = 60,000 shares60,000 shares / 12 months = 5,000 average sharesThis question tested from Session 8, Reading 25, LOS g.

Question 19 - #97968 On December 31, 2004, JME Corporation had 350,000 shares of common stock outstanding. On September 1, 2005, an additional 150,000 shares of common stock were issued. In addition, JME had $10 million of 8% convertible bonds outstanding at December 31, 2004, which are convertible into 200,000 shares of common stock. Net income for 2005 was $3 million. Assuming an income tax rate of 40%, what amount should be reported as the diluted earnings per share for 2005? A)$5.00.

B)$5.80.

C)$6.00.

Your answer: A was incorrect. The correct answer was B) $5.80. If bonds are converted, then net income will increase by 480,000 [10 million 0.08 (1 0.4)] and shares outstanding will increase by 200,000.numerator = 3,000,000 + 480,000 = 3,480,000denominator = 350,000 + (150,000 4/12) + 200,000 = 600,000diluted EPS = 3,480,000 / 600,000 = 5.80This question tested from Session 8, Reading 25, LOS h.

Question 20 - #98006 The Gaffe Company had net income of $1,500,000. Gaffe paid preferred dividends of $5 on each of the 100,000 preferred shares. Each preferred share is convertible into 20 common shares. There are 1 million Gaffe common shares outstanding. In addition to the common and preferred stock, Gaffe has $25 million of 4% bonds outstanding. If Gaffe's tax rate is 40%, what is its diluted earnings per share? A)$0.50.

B)$1.00.

C)$0.33.

Your answer: A was correct! The preferred shares are convertible into 100,000 20 = 2 million common shares. They are dilutive since:Basic EPS =$1,000,000 = $1.00

1,000,000

Diluted EPS =$1,500,000 = $0.50 which is less.

3,000,000

This question tested from Session 8, Reading 25, LOS h.

Question 21 - #98064 Extraordinary items are:A)unusual or infrequent.

B)reported above the line.

C)unusual and infrequent.

Your answer: A was incorrect. The correct answer was C) unusual and infrequent. Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.This question tested from Session 8, Reading 25, LOS e.

Question 22 - #97118 Selected financial information gathered from the Matador Corporation follows: 2007 2006 2005

Average debt $792,000 $800,000 $820,000

Average equity $215,000 $294,000 $364,000

Return on assets 5.9% 6.6% 7.2%

Quick ratio 0.3 0.5 0.6

Sales $1,650,000 $1,452,000 $1,304,000

Cost of goods sold $1,345,000 $1,176,000 $1,043,000

Using only the data presented, which of the following statements is most correct?A)Leverage has declined.

B)Gross profit margin has improved.

C)Return on equity has improved.

Your answer: A was incorrect. The correct answer was C) Return on equity has improved. Leverage increased as measured by the debt-to-equity ratio from 2.25 in 2005 to 3.68 in 2007. Gross profit margin declined from 20.0% in 2005 to 18.5% in 2007. Return on equity has improved since 2005. One measure of ROE is ROA financial leverage. Financial leverage (assets / equity) can be derived by adding 1 to the debt-to-equity ratio. In 2005, ROE was 23.4% [7.2% ROA (1 + 2.25 debt-to-equity)]. In 2007, ROE was 27.6% [5.9% ROA (1 + 3.68 debt-to-equity)]. This question tested from Session 8, Reading 28, LOS c.

Question 23 - #93821 Which of the following is NOT a cash flow from operation?A)interest payments.

B)dividends paid to shareholders.

C)dividends received.

Your answer: A was incorrect. The correct answer was B) dividends paid to shareholders. Dividends paid are a financing cash flow. Dividends received and interest paid are both operating cash flows.This question tested from Session 8, Reading 27, LOS a.

Question 24 - #97470 Favor, Inc.s capital and related transactions during 20X5 were as follows: On January 1, $1,000,000 of 5-year 10% annual interest bonds were issued to Cover Industries in exchange for old equipment owned by Cover. On June 30, Favor paid $50,000 of interest to Cover. On July 1, Cover returned the bonds to Favor in exchange for $1,500,000 par value 6% preferred stock. On December 31, Favor paid preferred stock dividends of $45,000 to Cover. Favor, Inc.s cash flow from financing (CFF) for 20X5 (assume U.S. GAAP) is:A)$45,000.

B)$95,000.

C)$1,045,000.

Your answer: A was correct! Only the preferred stock dividends paid would be considered CFF. Issuing bonds in exchange for equipment and exchanging bonds for stock are both noncash transactions that should be disclosed in a footnote to the Statement of Cash Flows. Interest paid is an operating cash flow under U.S. GAAP. This question tested from Session 8, Reading 27, LOS f.

Question 25 - #97940 Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7, Petersons net working capital was $350,000. The following transactions occurred during 20X7:Performed services on credit$150,000

Purchased office equipment for cash10,000

Recognized salaries expense54,000

Purchased paint supplies on on credit25,000

Consumed paint supplies20,000

Paid salaries50,000

Collected accounts receivable157,000

Recognized straight-line depreciation expense2,000

Paid accounts payable15,000

Calculate Petersons working capital at the end of 20X7 and the change in cash for the year 20X7.Working capitalChange in cash

A)$414,000$82,000

B)$416,000$80,000

C)$416,000$82,000

Your answer: A was incorrect. The correct answer was C) $416,000$82,000

TransactionAmountWorking capitalCash

Performed services on credit$150,000Increase A/R

Purchased PP&E for cash10,000Decrease cash-$10,000

Recognized salaries expense54,000Increase A/P

Purchased paint supplies on on credit25,000Increase inventories, increase A/P

Consumed paint supplies20,000Decrease inventories

Paid salaries50,000Decrease cash, decrease A/P-$50,000

Collected accounts receivable157,000Increase cash, decrease A/R+$157,000

Recognized straight-line depreciation expense2,000

Paid accounts payable15,000Decrease cash, decrease A/P-$15,000

The change in cash was $82,000 ($157,000 collections $10,000 from equipment purchase $50,000 salaries paid $15,000 for payables). Working capital at the end of 20X7 is $416,000 ($350,000 beginning working capital + $150,000 increase in accounts receivable from services $10,000 office equipment purchase $54,000 salaries expense accrual $20,000 consumed supplies). Purchasing $25,000 of paint supplies on credit has no net effect on working capital (current assets and current liabilities increase). Consuming $20,000 of these supplies reduces working capital (current assets decrease). Salary expense reduces working capital by $54,000 when recognized (current liabilities increase). Paying $50,000 of these salaries has no net effect on working capital (current assets and current liabilities decrease). Collecting accounts receivable has no net effect on working capital (one current asset increases and another decreases). Recognizing depreciation does not affect working capital. Paying accounts payable has no net effect on working capital (current assets and current liabilities decrease). This question tested from Session 8, Reading 26, LOS d.

Question 26 - #98061 Which of the following statements regarding making changes in accounting principles is least accurate?A)A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted principle. The firm making the change must justify the change.

B)The general rule is retrospective application.

C)Changes in accounting estimates are now treated the same as changes in accounting principles.

Your answer: A was incorrect. The correct answer was C) Changes in accounting estimates are now treated the same as changes in accounting principles. Changes in accounting estimates are not treated the same as changes in principles. Changes in principles are treated retrospectively, whereas changes in accounting estimates are accounted for in the current and future periods. Both remaining statements are accurate.This question tested from Session 8, Reading 25, LOS e.

Question 27 - #97808 Advantage Corp.'s capital structure was as follows:December 31, 2005December 31, 2004

Outstanding shares of stock:

Common110,000110,000

Convertible Preferred10,00010,000

8% Convertible Bonds$1,000,000$1,000,000

During 2005, Advantage paid dividends of $3 per share on its preferred stock. The preferred shares are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common stock. Net income for 2005 was $850,000. Assume the income tax rate is 30%.Calculate Advantage's basic and diluted earnings per share (EPS) for 2005.Basic EPSDiluted EPS

A)$7.45$5.66

B)$6.31$5.66

C)$7.45$6.26

Your answer: A was correct! Basic EPS = net income pref div / wt. ave. shares of common[850,00 (3 10,000)] / 110,000 = $7.45Diluted EPS = [(net income preferred dividends) + convertible preferred dividends + (convertible debt interest)(1 t)] / [(weighted average shares) + (shares from conversion of conv. pfd shares) + (shares from conversion of conv. debt) + (shares issuable from stock options)][(850,000 (3 10,000)) + 30,000 + (80,000)(1 0.3)] / [(110,000) + (20,000) + (30,000)] = $5.66. This question tested from Session 8, Reading 25, LOS h.

Question 28 - #97765 Cassie Hamilton is an analyst with Pacers Worldwide, an investment banking firm. She just received the following information (as of year-end) for Trotters Diversified: Average common shares outstanding of 5.0 million. Average market price for common stock of $35.00 per share. Net income of $9.0 million. Common stock dividends paid of $1.2 million. Preferred dividends paid (on convertible preferred stock noted below) of $1.5 million. Tax rate of 40%. 500,000 shares of cumulative convertible preferred stock with $30 par value and 10% dividend. Each preferred share is convertible into 5 common shares. 10,000 convertible $1,000 par bonds with a 6.0% coupon, each convertible into 8 shares of common stock. 400,000 stock options recently issued with an exercise price of $32.00 per share. Part 1)In the denominator of the basic EPS calculation, Hamilton should include how many shares related to the convertible bonds? A)0.

B)80,000.

C)10,000.

Your answer: A was correct! The calculation for basic EPS excludes the impact of complex capital elements. This question tested from Session 8, Reading 25, LOS h.Cassie Hamilton is an analyst with Pacers Worldwide, an investment banking firm. She just received the following information (as of year-end) for Trotters Diversified: Average common shares outstanding of 5.0 million. Average market price for common stock of $35.00 per share. Net income of $9.0 million. Common stock dividends paid of $1.2 million. Preferred dividends paid (on convertible preferred stock noted below) of $1.5 million. Tax rate of 40%. 500,000 shares of cumulative convertible preferred stock with $30 par value and 10% dividend. Each preferred share is convertible into 5 common shares. 10,000 convertible $1,000 par bonds with a 6.0% coupon, each convertible into 8 shares of common stock. 400,000 stock options recently issued with an exercise price of $32.00 per share. Part 2)Hamilton correctly calculates diluted EPS at approximately: A)$1.23.

B)$1.19.

C)$1.50.

Your answer: A was incorrect. The correct answer was B) $1.19. As we will show below, only the options and convertible preferred stock are dilutive.First, calculate basic EPS to use as a benchmark to determine dilutive capital components.Basic EPS = (net income preferred dividends) / weighted average common shares outstandingHere, preferred dividends = (0.5 shares $30 par 0.10 dividend) = $1.5 million = (9.0 1.5) / 5.0 = $1.50. Now, check for dilutive elements. options are dilutive because the exercise price is less than the stock price. There is no numerator impact from the options. The denominator impact = # options [(# options exercise price) / average stock price)] = 400,000 [(400,000 32) / 35] = 34,286 or 0.034 million. To check whether the convertible preferred stock is dilutive we need to determine whether it decreases EPS. To the numerator, we add back the preferred dividend. The denominator impact = (# preferred shares conversion rate) = 500,000 5 = 2,500,000, or 2.5 million. Then, EPS = (9.0 1.5 + 1.5) / (5.0 + 2.5) = $1.20. Thus the convertible preferred stock is dilutive. To check whether the convertible bonds are dilutive we need to determine whether they decrease EPS. To the numerator, we add back the after-tax impact of the coupon, or (face value coupon (1 t)), or (10,000 bonds 1,000 par 0.06 coupon 0.6 ) = 360,000, or $0.360 million. The denominator impact = (# convertible bonds conversion rate) = 10,000 8 = 80,000, or 0.080 million. Then, EPS = (9.0 1.5 + 0.360) / (5.0 + 0.080) = $1.55. Thus the bonds are antidilutive. Finally, calculate dilutive EPS:Diluted EPS = (9.0 1.5 + 1.5) / (5.0 + 2.5 + 0.034) = approximately $1.19This question tested from Session 8, Reading 25, LOS h.

Question 29 - #97830 An analyst has gathered the following information about a firm: Quick ratio of 0.25. Cash ratio of 0.20. $2 million in marketable securities. $10 million in cash. What is their receivables balance?A)3 million.

B)5 million.

C)2 million.

Your answer: A was correct! Cash ratio = (cash + marketable securities) / current liabilities0.20 = ($10,000,000 + $2,000,000) / current liabilitiescurrent liabilities = $12,000,000 / 0.2 = $60,000,000Quick ratio = [cash + marketable securities + receivables] / $60,000,0000.25 = [$10,000,000 + $2,000,000 + receivables] / $60,000,000($60,000,000)(0.25) = $12,000,000 + receivables$15,000,000 = $12,000,000 + receivables$15,000,000 $12,000,000 = receivables$3,000,000 = receivablesThis question tested from Session 8, Reading 28, LOS b.

Question 30 - #97962 Consider the following information on the past years operating performance and current capital structure for the following two companies:Supple Moves Perfect Collection

Paid no dividends Paid common & pref. div.

Ave. Stock Price of $42.00 Ave. Stock Price of $22.00

Positive net income Positive net income

110,000 warrants with an exercise price of $50.00 Convertible debt with an 8.0% coupon, conversion ratio at 10.0.

150,000 options outstanding with an exercise price of $19.50

Based on the information above, which of the companies has a complex capital structure?A)Perfect Collection only.

B)Supple Moves only.

C)Supple Moves and Perfect Collection.

Your answer: A was incorrect. The correct answer was C) Supple Moves and Perfect Collection. A complex capital structure is one that has potentially dilutive elements. Here, Supple Moves and Perfect Collection both meet this criteria. (The warrants for Supple Moves will be dilutive if the average stock prices were over $50.00.) This question tested from Session 8, Reading 25, LOS g.

Question 31 - #97743 Which of the following securities would least likely be found in a simple capital structure? A)6%, $5000 par value putable bond.

B)7%, $100 par value non convertible preferred.

C)3%, $100 par value convertible preferred.

Your answer: A was incorrect. The correct answer was C) 3%, $100 par value convertible preferred. A simple capital structure contains no potentially dilutive securities such as stock options, warrants, or convertible preferred stock. This question tested from Session 8, Reading 25, LOS g.

Question 32 - #97797 Which of the following statements regarding basic and diluted EPS is least accurate?A)A simple capital structure contains no potentially dilutive securities.

B)Antidilutive securities decrease EPS if they are exercised or converted.

C)Dilutive securities decrease EPS if they are exercised or converted to common stock.

Your answer: A was incorrect. The correct answer was B) Antidilutive securities decrease EPS if they are exercised or converted. Antidilutive securities increase EPS if exercised or converted to common stock. This question tested from Session 8, Reading 25, LOS h.

Question 33 - #97306 Murray Company reported the following revenues and expenses for the year ended 2007: Sales revenue $200,000

Wage expense 89,000

Insurance expense 17,000

Interest expense 10,400

Depreciation expense 50,000

Following are the related balance sheet accounts: 2007 2006

Unearned revenue $15,600 $13,200

Wages payable 5,400 6,600

Prepaid insurance 1,200 0

Interest payable 500 1,600

Accumulated depreciation 95,000 45,000

Calculate cash collections and cash expenses.Cash collections Cash expenses

A)$202,400 $58,100

B)$197,600 $119,900

C)$202,400 $119,900

Your answer: A was incorrect. The correct answer was C) $202,400 $119,900

Cash collections are $202,400 ($200,000 sales + $2,400 increase in unearned revenue). Cash expenses are $119,900 ($89,000 wages expense $1,200 decrease in wages payable $17,000 insurance expense $1,200 increase in prepaid insurance $10,400 interest expense $1,100 decrease in interest payable). Depreciation expense is a non-cash expense. This question tested from Session 8, Reading 27, LOS f.

Question 34 - #97980 As of the beginning of the year HalfPass Productions, Inc., had the following complex capital structure: 3,000,000 common shares outstanding. 175,000 options with an exercise price of $22. 250,000 warrants with an exercise price of $18. During the year: On March 1, the company issued 100,000 new shares of common stock. On July 1, the board of directors declared a 15% stock dividend. On September 1, the company repurchased 125,000 shares. Net income (after-tax) for the year was $7,500,000. The company paid common dividends of $2,750,000 and preferred dividends of $1,300,000. The average market price for the common stock was $25 per share. Assume the fiscal year is January 1 through December 31. At year end, HalfPasss basic EPS is closest to: A)$1.66.

B)$1.77.

C)$1.94.

Your answer: A was incorrect. The correct answer was B) $1.77. The question is asking for basic EPS. Thus we can ignore the dilutive options and warrants.Basic EPS = (net income preferred dividends) / weighted average common shares outstanding The numerator = $7.5 million $1.3 million = $6.2 million Calculating the denominator is a bit more work (calculation detailed in table below): Event Notes Million Shares # months outstanding Total

Beginning Bal. (BB) 3.000 12 36.000

New issue (March 01) 0.100 10 1.000

Stock Dividend 15% on BB 0.450 12 5.400

Stock Dividend 15% on new issue 0.015 10 0.150

Repurchase (Sept .1) -0.125 4 -0.500

Total 42.050

Average shares = 42,050,000 / 12 = 3,504,167Basic EPS = $6.2 million / 3.504 million = $1.77 This question tested from Session 8, Reading 25, LOS g.

Question 35 - #98024 Assume that the exercise price of an option is $10, and the average market price of the stock is $13. Assuming 999 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted earnings per share (EPS)?A)768.

B)999.

C)231.

Your answer: A was incorrect. The correct answer was C) 231. (999)(10) = 9,9909,990 / 13 = 768999 768 = 231This question tested from Session 8, Reading 25, LOS h.

Question 36 - #97914 A firms financial statements reflect the following: Current liabilities $4,000,000

Cash $400,000

Inventory $1,200,000

Accounts receivable $800,000

Short-term investments $2,000,000

Long-term investments $800,000

Accounts payable $2,500,000

What are the firms current ratio, quick ratio, and cash ratio?Current RatioQuick RatioCash Ratio

A)0.80.61.1

B)1.10.80.6

C)1.10.60.8

Your answer: A was incorrect. The correct answer was B) 1.10.80.6

Current ratio = (0.4 + 2.0 + 0.8 + 1.2) / 4.0 = 1.1.Quick ratio = (0.4 + 2.0 + 0.8) / 4.0 = 0.8. Cash ratio = (0.4 + 2.0) / 4.0 = 0.6.This question tested from Session 8, Reading 28, LOS b.

Question 37 - #98060 Football Contractors, Inc., which reports under U.S. GAAP, has contracted to build a stadium for the City of Washburn. The contract price is $100 million and costs are estimated at $60 million. Costs are not assured, however, because there is a material risk, which Football Contractors has assumed, that ground water problems might slow construction and increase costs by as much as $40 million. In 2004, the first year of the agreement, Football Contractors, Inc. billed $30 million, received a $20 million payment, and incurred $15 million in costs. For 2004 Football Contractors, Inc. should recognize revenue from the City of Washburn transaction in the amount of: A)$30 million.

B)$0.

C)$20 million.

Your answer: A was incorrect. The correct answer was B) $0. Under U.S. GAAP, the completed contract method is used when a reliable estimate of the total costs cannot be determined until the contract is finished. Because of the significant uncertainty surrounding the ground water costs, the completed contract method should be used in this transaction, and no revenue should be recognized in 2004 or any later year until the contract is completed or the cost uncertainty is resolved. This question tested from Session 8, Reading 25, LOS c.

Question 38 - #97938 Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis?Statement #1 Each line item is expressed as a percentage of its base-year amount.Statement #2 Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets.Statement #3 Each line item is expressed as a percentage of the prior years amount.Vertical analysis Horizontal analysis

A)Statement #1 Statement #2

B)Statement #2 Statement #1

C)Statement #2 Statement #3

Your answer: A was incorrect. The correct answer was B) Statement #2 Statement #1

Horizontal common-size analysis involves expressing each line item as a percentage of the base-year figure. Vertical common-size analysis involves expressing each line item of the income statement as a percentage of revenue and each line item of the balance sheet as a percentage of ending total assets. This question tested from Session 8, Reading 28, LOS a.

Question 39 - #97920 An analyst gathered the following data about a company: Current liabilities are $300. Total debt is $900. Working capital is $200. Capital expenditures are $250. Total assets are $2,000. Cash flow from operations is $400. If the company would like a current ratio of 2, they could:A)decrease current assets by 100 or increase current liabilities by 50.

B)increase current assets by 100 or increase current liabilities by 50.

C)increase current assets by 100 or decrease current liabilities by 50.

Your answer: A was incorrect. The correct answer was C) increase current assets by 100 or decrease current liabilities by 50. For the current ratio to equal 2.0, current assets would need to move to $600 (or up by $100) or current liabilities would need to decrease to $250 (or down by $50). Remember that CA CL = working capital (500 300 = 200). This question tested from Session 8, Reading 28, LOS b.

Question 40 - #97871 To calculate the cash ratio, the total of cash and marketable securities is divided by: A)total liabilities.

B)total assets.

C)current liabilities.

Your answer: A was incorrect. The correct answer was C) current liabilities. Current liabilities are used in the denominator for the: current, quick, and cash ratios. This question tested from Session 8, Reading 28, LOS b.

Question 41 - #97975 The following data pertains to the McGuire Company: Net income equals $15,000. 5,000 shares of common stock issued on January 1. 10% stock dividend issued on June 1. 1000 shares of common stock were repurchased on July 1. 1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year. What is the companys basic earnings per share (EPS)?A)$1.00.

B)$2.50.

C)$1.20.

Your answer: A was correct! Number of average shares:1/1 5,500 shares issued (includes 10% stock dividend on 6/1) 12 = 66,0007/1 1,000 shares repurchased 6 months = 6,00066,000 6,000 = 60,00060,000 shares / 12 months = 5,000 average sharesPreferred dividends = ($10)($1,000) = $10,000Basic EPS = [$15,000(NI) $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/shareThis question tested from Session 8, Reading 25, LOS g.

Question 42 - #98032 JME Construction always uses the percentage of completion method of recognizing revenue. During 2004 JME signs a contract in the amount of $10 million with the following data available: Costs incurred to date $2,200,000

Billings to date $2,000,000

Cash collected $1,750,000

Total cost of project $8,800,000

How much gross profit should JME recognize for 2004? A)$300,000.

B)-$200,000.

C)-$450,000.

Your answer: A was correct! stage of completion = 25%(2.2 / 8.8)revenue to be recognized = 0.25 10 million = 2.5 milliongross profit = 2.5 million 2.2 million = 300,000This question tested from Session 8, Reading 25, LOS b.

Question 43 - #97910 An analyst has collected the following data about a firm: Receivables turnover = 10 times. Inventory turnover = 8 times. Payables turnover = 12 times. What is the average receivables collection period, the average inventory processing period, and the average payables payment period? (assume 360 days in a year)ReceivablesCollection PeriodInventoryProcessing PeriodPayablesPayment Period

A)30 days30 days60 days

B)45 days36 days30 days

C)36 days45 days30 days

Your answer: A was incorrect. The correct answer was C) 36 days45 days30 days

Receivables collection period = 360 / 10 = 36 daysInventory processing period = 360 / 8 = 45 daysPayables payment period = 360 / 12 = 30 daysThis question tested from Session 8, Reading 28, LOS b.

Question 44 - #97822 How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per share?A)Increase EPS.

B)Either decrease or increase EPS depending upon if the security is dilutive or antidilutive.

C)Decrease EPS.

Your answer: A was incorrect. The correct answer was C) Decrease EPS. Dilutive securities such as convertibles and options are found in a complex capital structure and always decrease EPS. Convertibles and options may also be antidilutive, which will increase EPS hence the name antidilutive. The only way to know if a security is dilutive or antidilutive is to compare the basic EPS to diluted EPS. If the diluted EPS is higher than the basic EPS then the security is antidilutive and should not be included when determining diluted EPS.This question tested from Session 8, Reading 25, LOS h.

Question 45 - #97787 Based on the following data, how many shares of common stock should be used to calculate diluted earnings per share? Net income of $1,500,000, tax retention rate of 60% 1,000,000 shares of common are outstanding at the beginning of the year. 10,000, 6% convertible bonds with each bond convertible into 20 shares of common stock were issued at par ($100) on June 30th of this year. The firm has 100,000 warrants outstanding all year with an exercise price of $25 per share. The average stock price for the period is $20, and the ending stock price is $30. A)1,100,000.

B)1,266,667.

C)1,000,000.

Your answer: A was correct! First, Check for dilution: Basic EPS = 1,500,000 / 1,000,000 = 1.50Warrants: anti-dilutive since the average stock price is less than the exercise priceConvertible bonds: numerator impact = (# bonds) (par value) (interest rate) (tax retention rate) (0.5 for 1/2 year outstanding) = (10,000) (100) (0.06) (0.6) (0.5) = 18,000, so the numerator = 1,518,000 Denominator impact: increase in average shares = [(# bonds) (conversion factor) (# months outstanding)] / 12 = (1,200,000 / 12 = 100,000) so, the denominator = 1,100,000 and EPS with conversion = 1,518,000 / 1,100,000 = 1.38, which is less than 1.50. The bonds are dilutive and the diluted EPS calculation should use 1,100,000 shares of common stock in the denominator. The warrants are out of the money based on the average price of $20.This question tested from Session 8, Reading 25, LOS h.

Question 46 - #97762 In applying the treasury stock method, if warrants allow the purchase of 1 million shares at $42 per share when the average price is $56 per share, how many shares will be added to the firms weighted average number of shares outstanding? A)250,000.

B)1,000,000.

C)420,000.

Your answer: A was correct! The treasury stock method would allow the 1 million additional shares to be partially offset by the number of shares that could be repurchased with the amount of money received for those shares. In this case, the 1 million shares issued would be offset by (1,000,000 $42 / $56) or 750,000 shares. This question tested from Session 8, Reading 25, LOS h.

Question 47 - #97932 Which of the following ratios would least likely measure liquidity?A)Quick ratio.

B)Current ratio.

C)Return on assets (ROA).

Your answer: A was incorrect. The correct answer was C) Return on assets (ROA). ROA = (EBIT / average total assets) which measures management's ability and efficiency in using the firm's assets to generate operating profits. Other ratios that measure liquidity (if a company can pay its current bills) besides the quick, cash, and current ratios are the: receivables turnover, inventory turnover, and payables turnover ratios.This question tested from Session 8, Reading 28, LOS b.

Question 48 - #97069 Comparative income statements for E Company and G Company for the year ended December 31 show the following (in $ millions):E CompanyG Company

Sales7090

Cost of Goods Sold(30)(40)

Gross Profit4050

Sales and Administration(5)(15)

Depreciation(5)(10)

Operating Profit3025

Interest Expense(20)(5)

Earnings Before Taxes1020

Income Taxes(4)(8)

Earnings after Taxes612

The financial risk of E Company, as measured by the interest coverage ratio, is:A)higher than G Company's because its interest coverage ratio is less than G Company's, but at least one-third of G Company's.

B)higher than G Company's because its interest coverage ratio is less than one-third of G Company's.

C)lower than G Company's because its interest coverage ratio is at least three times G Company's.

Your answer: A was incorrect. The correct answer was B) higher than G Company's because its interest coverage ratio is less than one-third of G Company's. E Companys interest coverage ratio (EBIT / interest expense) is (30 / 20) = 1.5.G Companys interest coverage ratio is (25 / 5) = 5.0. Higher interest coverage means greater ability to cover required interest and lease payments. Note that 1.5 / 5.0 = 0.30, which means the interest coverage for E Company is less than 1/3 that of G Company.This question tested from Session 8, Reading 28, LOS c.

Question 49 - #97868 Are the following statements about common-size financial statements correct or incorrect?Statement #1 Expressing financial information in a common-size format enables the analyst to make better comparisons between two firms of similar size that operate in different industries.Statement #2 Common-size financial statements can be used to highlight the structural changes in the firms operating results and financial condition that have occurred over time.With respect to these statements:A)only one is correct:

B)both are correct.

C)both are incorrect.

Your answer: A was correct! Vertical common-size statements enable the analyst to make better comparisons of two firms of different sizes that operate in the same industry. Horizontal common-size financial statements express each line as a percentage of the base year figure; thus, horizontal common-size statements can be used to identify structural changes in a firms operating results and financial condition over time. This question tested from Session 8, Reading 28, LOS a.

Question 50 - #97923 XYZ, Inc., latest Income Statement, Balance Sheet and Statement of Cash Flows are below. Use this information to answer the following questions:Income Statement

Sales Revenue19,580

Cost of Goods Sold7,319

Gross Margin12,261

Wage Expense900

SG&A4,336

Depreciation Expense662

5,898

Income from Operations6,363

Other Income/Expenses

Interest Expense(750)

Gain on Sale of Land119

(631)

Pretax Income5,732

Income tax1,605

Net Income4,127

Balance Sheet

12/31/0412/31/03

Assets

Current Assets

Cash2,098410

Accounts receivable4,5704,900

Inventory4,7524,500

Prepaid SGA877908

Total12,29710,718

Land04,000

Property, Plant & Equipment11,00011,000

Accumulated Depreciation(5,862)(5,200)

Total Assets17,43520,518

Cash Flow from Operations

Net Income4,127

Increase in Accounts Receivable330

Increase in Accounts Payable(489)

Increase in Inventory(252)

Increase in Wages Payable94

Increase in Prepaid SGA31

Depreciation662

Gain on Sale of Land(119)

Net cash from Operations4,384

Cash Flow from Investments

Sale of Land4,119

Net Cash from Investments4,119

Cash Flow from Financing

Retirement of LT Debt(6,042)

Dividends Paid(773)

Net Cash from Financing(6,815)

Net Increase in Cash1,688

Beginning Cash410

Ending Cash2,098

Liabilities and Equity

12/31/0412/31/03

Current Liabilities

Accounts Payable4,6515,140

Wages Payable2,9842,890

Dividends Payable100100

Total7,7358,130

Long term Debt1,3467,388

Equity

Common Stock4,0004,000

Retained Earnings4,3541,000

Total Liabilities and Equity17,43520,518

Part 1)At the end of 2004, what were XYZs current, quick and cash ratios? Current RatioQuick RatioCash Ratio

A)1.591.590.27

B)1.480.860.27

C)1.590.860.27

Your answer: A was incorrect. The correct answer was C) 1.590.860.27

Current ratio = current assets / current liabilities = 12,297 / 7,735 = 1.59Quick ratio = (cash + receivables) / current liabilities = 2,098 + 4,570 / 7,735 = 0.86Cash ratio = cash / current liabilities = 2,098 / 7,735 = 0.271This question tested from Session 8, Reading 28, LOS b.XYZ, Inc., latest Income Statement, Balance Sheet and Statement of Cash Flows are below. Use this information to answer the following questions:Income Statement

Sales Revenue19,580

Cost of Goods Sold7,319

Gross Margin12,261

Wage Expense900

SG&A4,336

Depreciation Expense662

5,898

Income from Operations6,363

Other Income/Expenses

Interest Expense(750)

Gain on Sale of Land119

(631)

Pretax Income5,732

Income tax1,605

Net Income4,127

Balance Sheet

12/31/0412/31/03

Assets

Current Assets

Cash2,098410

Accounts receivable4,5704,900

Inventory4,7524,500

Prepaid SGA877908

Total12,29710,718

Land04,000

Property, Plant & Equipment11,00011,000

Accumulated Depreciation(5,862)(5,200)

Total Assets17,43520,518

Cash Flow from Operations

Net Income4,127

Increase in Accounts Receivable330

Increase in Accounts Payable(489)

Increase in Inventory(252)

Increase in Wages Payable94

Increase in Prepaid SGA31

Depreciation662

Gain on Sale of Land(119)

Net cash from Operations4,384

Cash Flow from Investments

Sale of Land4,119

Net Cash from Investments4,119

Cash Flow from Financing

Retirement of LT Debt(6,042)

Dividends Paid(773)

Net Cash from Financing(6,815)

Net Increase in Cash1,688

Beginning Cash410

Ending Cash2,098

Liabilities and Equity

12/31/0412/31/03

Current Liabilities

Accounts Payable4,6515,140

Wages Payable2,9842,890

Dividends Payable100100

Total7,7358,130

Long term Debt1,3467,388

Equity

Common Stock4,0004,000

Retained Earnings4,3541,000

Total Liabilities and Equity17,43520,518

Part 2)What was the return on equity (ROE) based on year-end equity? A)0.49.

B)0.67.

C)0.58.

Your answer: A was correct! ROE = net income / equity = 4,127 / 8,354 = 0.49This question tested from Session 8, Reading 28, LOS b.

Question 51 - #97971 If a reliable estimate of total costs of the contract does not exist, which of the following revenue recognition methods should be used?A)Cost recovery method.

B)Percentage-of-completion method.

C)Completed contract method.

Your answer: A was incorrect. The correct answer was C) Completed contract method. The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.The percentage-of-completion method is used when ultimate payment is assured and revenue is earned as costs are incurred. Profit is recognized corresponding to the percentage of costs incurred to the total estimated.This question tested from Session 8, Reading 25, LOS b.

Question 52 - #98048 To be classified as an extraordinary item on the income statement under U.S. GAAP, the item must be: A)probable and infrequent in nature.

B)unusual in nature and infrequent in occurrence.

C)estimated and probable.

Your answer: A was incorrect. The correct answer was B) unusual in nature and infrequent in occurrence. Extraordinary items are unusual and infrequent events that are reported separately, net of tax "below the line." Examples are expropriations by foreign governments and uninsured losses from earthquakes, eruptions, and tornadoes. This question tested from Session 8, Reading 25, LOS e.

Question 53 - #97906 Which of the following is least likely a routinely used operating profitability ratio?A)Net income/net sales.

B)Sales/Total Assets

C)Gross profit/net sales.

Your answer: A was incorrect. The correct answer was B) Sales/Total Assets Sales/Total Assets, or Total Asset Turnover is a measure of operating efficiency, not operating profitability. This question tested from Session 8, Reading 28, LOS b.

Question 54 - #97329 The net income for Miller Bat Company was $3 million for the year ended December 31, 20X4. Additional information is as follows: Depreciation on fixed assets: $1,500,000 Gain from cash sales of land: 200,000 Increase in accounts payable: 300,000 Dividends paid on preferred stock: 400,000 Under U.S. GAAP, the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 20X4 is: A)$4,600,000.

B)$4,200,000.

C)$4,500,000.

Your answer: A was correct! $3,000,000 + $1,500,000 $200,000 + $300,000 = $4,600,000. This question tested from Session 8, Reading 27, LOS f.

Question 55 - #97955 A firm had the following numbers of shares outstanding during the year: Beginning of year 8,000,000 shares

Issued on April 1 750,000 shares

Paid stock divided of 20% on July 1

Issued on October 1 100,000 shares

Purchased Treasury stock November 1 1,000,000 shares

Split 2 for 1 on December 31

Based on this information, what is the weighted number of shares outstanding for the year?A)20,783,333.

B)42,444,444.

C)20,266,667.

Your answer: A was incorrect. The correct answer was C) 20,266,667. Outstanding all year 8,000,000 1.2 2 1.0 19,200,000

Outstanding for 0.75 years 750,000 1.2 2 0.75 1,350,000

Outstanding for 0.25 years 100,000 2 0.25 50,000

Retired for 2 months -1,000,000 2 (2/12) 333,333

Weighted average number of shares for year: 20,266,667

This question tested from Session 8, Reading 25, LOS g.

Question 56 - #95657 Changes in asset lives and salvage value are changes in accounting: A)estimates and no specific disclosures are required.

B)principle and specific disclosures are required.

C)estimates and specific disclosures are required.

Your answer: A was correct! Changes in asset lives and salvage value are changes in accounting estimates and are not considered changes in accounting principle. No specific disclosures are required. This question tested from Session 8, Reading 25, LOS e.

Question 57 - #98041 Stanley Corp. had 100,000 shares of common stock outstanding throughout 2004. It also had 20,000 stock options with an exercise price of $20 and another 20,000 options with an exercise price of $28. The average market price for the company's stock was $25 throughout the year. The stock closed at $30 on December 31, 2004. What are the number of shares used to calculate diluted earnings per share for the year?A)104,000.

B)105,000.

C)110,000.

Your answer: A was correct! Only the stock options with an exercise price of $20 are dilutive. The additional shares of 4,000 (20,000 [(20,000 20) / 25]) are added to the 100,000 common shares outstanding. This question tested from Session 8, Reading 25, LOS h.

Question 58 - #97320 Eagle Companys financial statements for the year ended December 31, 20X5 were as follows (in $ millions):Income Statement

Sales150

Cost of Goods Sold(48)

Wages Expense(56)

Interest Expense(12)

Depreciation(22)

Gain on Sale of Equipment6

Income Tax Expense( 8)

Net Income10

Balance Sheet

12-31-X412-31-X5

Cash3252

Accounts Receivable1822

Inventory4644

Property, Plant & Equip. (net)182160

Total Assets278278

Accounts Payable2833

Long-term Debt145135

Common Stock7070

Retained Earnings3540

Total Liabilities & Equity278278

Cash flow from operations (CFO) for Eagle Company for the year ended December 31, 20X5 was (in $ millions).A)$41.

B)$29.

C)$37.

Your answer: A was incorrect. The correct answer was B) $29. Using the indirect method:Add: Net Income$10

Add: Depreciation Expense22

Less: Gain from Sale of Equip.(6)

Less: Increase in Accounts Receivable(4)

Add: Decrease in Inventory2

Add: Increase in Accounts Payable5

Cash flow from operations (CFO)29

This question tested from Session 8, Reading 27, LOS f.

Question 59 - #97806 An analyst has gathered the following information about a company:Balance Sheet

Assets

Cash100

Accounts Receivable750

Marketable Securities300

Inventory850

Property, Plant & Equip900

Accumulated Depreciation(150)

Total Assets2750

Liabilities and Equity

Accounts Payable300

Short-Term Debt130

Long-Term Debt700

Common Stock1000

Retained Earnings620

Total Liab. and Stockholder's equity2750

Income Statement

Sales1500

COGS1100

Gross Profit400

SG&A150

Operating Profit250

Interest Expense25

Taxes75

Net Income150

What is the receivables collection period?A)243.

B)365.

C)183.

Your answer: A was incorrect. The correct answer was C) 183. Receivables turnover = 1,500(sales) / 750(receivables) = 2.0Average receivables collection period = 365 / 2 = 182.5 or 183This question tested from Session 8, Reading 28, LOS b.

Question 60 - #93593 Interest payments, either as part of a coupon payment or to creditors, are considered which type of cash flow under U.S. GAAP? A)Financing.

B)Operating.

C)Investing.

Your answer: A was incorrect. The correct answer was B) Operating. Under U.S. GAAP, interest paid is an operating cash flow. This question tested from Session 8, Reading 27, LOS a.

Question 61 - #97413 An analyst has gathered the following information about a company:Income Statement for the Year 20X4

Sales$1,500

Expenses

COGS$1,300

Depreciation30

Int. Expenses40

Total expenses1,370

Income from cont. op.130

Gain on sale30

Income before tax160

Income tax64

Net Income$96

Additional Information:

Dividends paid $30

Common stock sold 20

Equipment purchased 50

Bonds issued 80

Fixed asset sold for (original cost of $100 with accumulated depreciation of $70) 60

Accounts receivable decreased by 30

Inventory decreased by 20

Accounts payable increased by 20

Wages payable decreased by 10

What is the cash flow from operations?A)$170.

B)$156.

C)$150.

Your answer: A was incorrect. The correct answer was B) $156. Net Income+$96

Depreciation+30

Gain on sale of asset-30

Accts. Rec.+30

Inventory+20

Accts. Payable+20

Wages Payable-10

CFO+$156

This question tested from Session 8, Reading 27, LOS f.

Question 62 - #97863 Given the following income statement and balance sheet for a company:Balance Sheet

AssetsYear 2003Year 2004

Cash500450

Accounts Receivable600660

Inventory500550

Total CA13001660

Plant, prop. equip10001250

Total Assets26002,910

Liabilities

Accounts Payable500550

Long term debt7001102

Total liabilities12001652

Equity

Common Stock400538

Retained Earnings1000720

Total Liabilities & Equity26002,910

Income Statement

Sales3000

Cost of Goods Sold(1000)

Gross Profit2000

SG&A500

Interest Expense151

EBT1349

Taxes (30%)405

Net Income944

What is the average receivables collection period?A)76.7 days.

B)80.3 days.

C)60.6 days.

Your answer: A was correct! Average collection period = 365 / receivables turnoverReceivables turnover = sales / average receivables = 3,000 / 630 = 4.76Average receivables collection period = 365 / 4.76 = 76.65This question tested from Session 8, Reading 28, LOS b.

Question 63 - #97386 In preparing its cash flow statement for the year ended December 31, 20x4, Giant Corporation collected the following data:Gain on sale of equipment $6,000

Proceeds from sale of equipment 10,000

Purchase of Zip Co. bonds for 180,000 (maturity value $200,000)

Amortization of bond discount 2,000

Dividends paid (75,000)

Proceeds from sale of Treasury stock 38,000

In its December 31, 20x4, statement of cash flows, under U.S. GAAP, what amounts should Giant report as net cash used in investing activities and net cash used in financing activities?Investing ActivitiesFinancing Activities

A)$170,000$37,000

B)$170,000-$38,000

C)$178,000-$37,000

Your answer: A was correct! Investing Activities:$10,000 $180,000 = -$170,000 cash flow from investing or $170,000 usedFinancing Activities:$38,000 $75,000 = -$37,000 cash flow from financing or $37,000 usedNote that the question asked for net cash used therefore this is a positive cash outflow.This question tested from Session 8, Reading 27, LOS a.

Question 64 - #97414 The Beeline Company has the following balance sheet and income statement.Beeline Company Balance Sheet

As of December 31, 20X4

2003200420032004

Cash$50$60Accounts payable$100$150

Accounts receivable100110Long-term debt400300

Inventory200 180 Common stock5050

Retained earnings400 500

Fixed assets (gross)800900Total liabilities and equity$950$1,000

Less: Accumulated depreciation200250

Fixed assets (net)600 650

Total assets$950$1,000

Beeline Company Income Statement

For year ended December 31, 20X4

Sales$1,000

Less:

COGS600

Depreciation50

Selling, general, and administrative expenses160

Interest expense23

Income before taxes$167

Less tax67

Net income$100

The cash flow from operations for 2004 is:A)$210.

B)$260.

C)$150.

Your answer: A was correct! Cash flow from operations (CFO) calculated using the indirect method is: net income (100) + depreciation (50) increase in accounts receivable (10) + decrease in inventory (20) + increase in accounts payable (50) = $210. This question tested from Session 8, Reading 27, LOS f.

Question 65 - #97321 When calculating cash flow from operations (CFO) using the indirect method which of the following is most accurate?A)When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows.

B)The indirect method requires an additional schedule to reconcile net income to cash flow.

C)In using the indirect method, each item on the income statement is converted to its cash equivalent.

Your answer: A was correct! When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. This is because the gain would be double counted in the investing section and in net income. Therefore, the gain must be removed from net income. The direct method of cash flow calculation converts the income statement items to their cash equivalents, not the indirect method. Also, depreciation is added to net income in order to calculate CFO using the indirect method. This question tested from Session 8, Reading 27, LOS f.

Question 66 - #96591 Kellen Harris is a credit analyst with the First National Bank. Harris has been asked to evaluate Longhorn Supply Companys cash needs. Harris began by calculating Longhorns turnover ratios for 2007. After a discussion with Longhorns management, Harris decides to adjust the turnover ratios for 2008 as follows: 2007 Actual Turnover Expected Increase / (Decrease)

Accounts receivable 5.0 10%

Fixed asset 3.0 7%

Accounts payable 6.0 (20%)

Inventory 4.0 (5%)

Equity 5.5

Total asset 2.3 8%

Longhorns expected cash conversion cycle for 2008, based on the expected changes in turnover and assuming a 365 day year, is closest to: A)82 days.

B)46 days.

C)86 days.

Your answer: A was incorrect. The correct answer was C) 86 days. 2008 expected days of sales outstanding is 66 [365 / (5.0 1.1)], 2008 days of inventory on hand is 96 [365 / (4.0 0.95)], and 2008 days of payables is 76 [365 / (6.0 0.8)]. Expected cash conversion cycle is 86 days [66 days of sales outstanding + 96 days of inventory on hand 76 days of payables]. This question tested from Session 8, Reading 28, LOS c.

Question 67 - #97350 Determine the cash flow from investing given the following table:ItemAmount

Cash payment of dividends$30

Sale of equipment$25

Net income$25

Purchase of land$15

Increase in accounts payable$20

Sale of preferred stock$25

Increase in deferred taxes$5

A)-$5.

B)$10.

C)-$10.

Your answer: A was incorrect. The correct answer was B) $10. ItemAmount

Cash payment of dividendsCFF-$30

Sale of equipmentCFI+$25

Net incomeCFO+$25

Purchase of landCFI-$15

Increase in accounts payableCFO+$20

Sale of preferred stockCFF+$25

Increase in deferred taxesCFO+$5

CFI = Sale of Equipment (+25) + Purchase of Land (15) = $10.This question tested from Session 8, Reading 27, LOS f.

Question 68 - #98063 A video rental store with a large inventory of newly released movies is attempting to determine an appropriate method of depreciation for its movies for rental. As well, it is trying to determine an appropriate method of determining the cost of its inventory of movies for sale. Which of the following treatments is most appropriate for the movies for rental and movies for sale? Movies for rental Movies for sale

A)Accelerated depreciation First-in, first-out

B)Straight-line depreciation Last-in, first-out

C)Accelerated depreciation Last-in, first-out

Your answer: A was correct! With the movies for rental, a greater portion of the decrease in the value of newly released movies would reasonably be realized in the first year, given the rapid rate of obsolescence in view of the large number of movies available. Therefore, depreciating this pool of assets by a greater amount in the first year using an accelerated depreciation method better approximates economic depreciation than depreciating it straight line. With the movies for sale, there are two methods available for accounting as inventory. FIFO is appropriate for inventory that has a limited shelf life and LIFO is appropriate for inventory that does not deteriorate with age. Because the movies have a very limited shelf life and will greatly deteriorate in value with age, especially after the first year, FIFO is the most appropriate method of accounting for the movies for sale. This question tested from Session 8, Reading 25, LOS d.

Question 69 - #97419 An analyst has gathered the following information about a company:Income Statement for the Year 20X5

Sales$1,500

Expenses

COGS$1,300

Depreciation20

Goodwill10

Int. Expenses40

Total expenses1,370

Income from cont. op.130

Gain on sale30

Income before tax160

Income tax64

Net Income$96

Additional Information:

Dividends paid 30

Common stock sold 20

Equipment purchased 50

Bonds issued 80

Fixed asset sold for (original cost of $100 with accumulated depreciation of $70) 60

Accounts receivable decreased by 30

Inventory decreased by 20

Accounts payable increased by 20

Wages payable decreased by 10

What is the cash flow from investing?A)$10.

B)$130.

C)$110.

Your answer: A was correct! Purchase of equipment-$50

Fixed asset sold$60

CFI$10

This question tested from Session 8, Reading 27, LOS f.

Question 70 - #97302 On January 1, 2008, Tenant Company leased office space from Landlord Inc. for 5 years at $75,000 per month. On that same date, Tenant made the following payments to Landlord:First months rent $75,000

Last months rent 75,000

Security deposit 100,000

Lease improvements 1,500,000

The leasehold improvements include build-out costs to install office walls, restrooms, and a kitchen. Tenant allocates the cost of the leasehold improvements over the lease term using the straight-line method. What amount of total lease expense should Tenant report for the year ended 2008 and what is the balance of all of the lease related assets on December 31, 2008, assuming the lease payments are made on the first day of each month? Lease expense Lease related assets

A)$1,200,000 $1,375,000

B)$1,200,000 $1,200,000

C)$375,000 $1,375,000

Your answer: A was correct! Total annual lease expense is $1,200,000 [$75,000 monthly payment 12 months) + ($1,500,000 lease improvements / 5 years)]. At the end of 2008, Tenant will report lease related assets of $1,375,000 [$75,000 prepaid rent + 100,000 deposit + $1,200,000 book value of leasehold improvements]. This question tested from Session 8, Reading 26, LOS g.

Question 71 - #97307 Maverick Company reported the following financial information for 2007:in millions

Beginning accounts receivable $180

Ending accounts receivable 225

Sales 11,000

Beginning inventory 2,000

Ending inventory 2,300

Purchases 8,100

Beginning accounts payable 1,600

Ending accounts payable 1,200

Calculate Mavericks cost of goods sold and cash paid to suppliers for 2007.Cost of goods sold Cash paid to suppliers

A)$7,800 million $7,100 million

B)$3,800 million $8,500 million

C)$7,800 million $8,500 million

Your answer: A was incorrect. The correct answer was C) $7,800 million $8,500 million

Cost of goods sold is equal to $7,800 million ($2,000 million beginning inventory + $8,100 million purchases $2,300 million ending inventory). Cash paid to suppliers is equal to $8,500 million ($7,800 COGS $300 million increase in inventory $400 million decrease in accounts payable). Alternate solution: Cash paid to suppliers is equal to $8,500 million ($8,100 million purchases $400 decrease in accounts payable). This question tested from Session 8, Reading 27, LOS f.

Question 72 - #97376 An examination of the cash receipts and payments of Xavier Corporation reveals the following:Cash paid to suppliers for purchase of merchandise$5,000

Cash received from customers14,000

Cash paid for purchase of equipment22,000

Dividends paid2,000

Cash received from issuance of preferred stock10,000

Interest received on short-term investments1,000

Wages paid4,000

Repayment of loan to the bank5,000

Cash from sale of land 12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be: CFFCFI

A)$10,000$12,000

B)$3,000$12,000

C)$3,000-$10,000

Your answer: A was incorrect. The correct answer was C) $3,000-$10,000

Cash flow relating to financing activities includes dividends paid, cash received from preferred stock, and repayment of loan. -2,000 + 10,000 + -5,000 = 3,000.Cash flow relating to investing activities includes cash paid for equipment and cash from sale of land. -22,000 + 12,000 = -10,000.This question tested from Session 8, Reading 27, LOS a.

Question 73 - #97691 A firms financial statements reflect the following: Net profit margin 15%

Sales $10,000,000

Interest payments $1,200,000

Avg. assets $15,000,000

Equity $11,000,000

Avg. working capital $800,000

Dividend payout rate 35%

Which of the following is the closest estimate of the firms sustainable growth rate?A)9%.

B)10%.

C)8%.

Your answer: A was correct! Return on equity (ROE) = net profit margin asset turnover leverage = (0.15)(0.67)(1.364) = 0.137.The sustainable growth = (1 dividend rate)(ROE) = (0.65)(0.137) = 8.9%. This question tested from Session 8, Reading 28, LOS e.

Question 74 - #97278 Carpenter Corporation reported the following statement of shareholders equity as of December 31, 2006:Common stock at par $600,000

Additional paid-in-capital 900,000

Treasury stock (200,000)

Retained earnings 10,500,000

Accumulated other comprehensive income 450,000

$12,250,000

During 2007, Carpenter: earned net income of $1,700,000. declared dividends of $300,000. $75,000 of the dividends remain unpaid. purchased held-to-maturity securities for $100,000. The securities have a fair value of $110,000 at year-end. purchased available-for-sale securities for $250,000. The securities have a fair value of $225,000 at year-end. translated the financial statements of a foreign subsidiary and calculated a $90,000 unrealized gain. purchased treasury stock for $75,000. The stock was valued at $60,000 when issued. Calculate Carpenters retained earnings and accumulated other comprehensive income as of December 31, 2007.Retained earnings Accumulated other comprehensive income

A)$11,900,000 $515,000

B)$11,900,000 $65,000

C)$12,125,000 $515,000

Your answer: A was correct! As of December 31, 2007, Carpenters retained earnings is $11,900,000 [$10,500,000 beginning balance + $1,700,000 net income $300,000 dividends declared]. Accumulated other comprehensive income is $515,000 [$450,000 beginning balance $25,000 unrealized loss from available for sale securities ($225,000 fair value $250,000 cost) + $90,000 unrealized translation gain]. There is no impact on retained earnings or accumulated other comprehensive income from unrealized gains and losses on held-to-maturity securities since the securities are not reported at fair value on the balance sheet. The purchase of treasury stock does not affect comprehensive income because it is a transaction with shareholders. This question tested from Session 8, Reading 26, LOS f.

Question 75 - #97939 Given the following information about a firm: Net Sales = $1,000. Cost of Goods Sold = $600. Operating Expenses = $200. Interest Expenses = $50. Tax Rate = 34%. What are the gross and operating profit margins?Gross Operating MarginOperating Profit Margin

A)40%10%

B)40%20%

C)20%15%

Your answer: A was incorrect. The correct answer was B) 40%20%

Gross profit margin = ($1,000 net sales $600 COGS) / $1,000 net sales = 400 / 1,000 = 0.4Operating profit margin = ($1,000 net sales $600 COGS $200 operating expenses) / $1,000 net sales = $200 / $1000 = 0.2This question tested from Session 8, Reading 28, LOS b.

Question 76 - #98074 Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on January 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firms basic earnings per share (EPS) for 2004? A)$2.64.

B)$2.71.

C)$2.91.

Your answer: A was correct! 1/1/00 22,000 shares (adjusted for 10% stock dividend) 12 months = 264,0006/1/00 7,700 shares (adjusted for 10% stock dividend) 7 months = 53,900 Total share month = 317,900Average shares = 317,900 / 12 = 26,492Basic EPS = ($150,000 $80,000) / 26,492 = 2.64 This question tested from Session 8, Reading 25, LOS g.

Question 77 - #98022 On January 1, 2007, Sneed Corporation purchased machinery costing $8 million with a salvage value of $1 million. For the year ended 2007, Sneed recognized depreciation expense of $3.2 million from the machinery using the double-declining-balance method. Should the depreciation expense be reported as an operating component in the income statement, and what is the estimated useful life of the machinery?Operating expense Useful life

A)No 5 years

B)Yes 4 years

C)Yes 5 years

Your answer: A was incorrect. The correct answer was C) Yes 5 years

Depreciation expense is reported as an operating component in the income statement. Given the first year depreciation expense of $3.2 million, and the original cost of $8 million, the declining balance percentage is 40% ($3.2 million depreciation expense / $8 million cost). The double declining balance percentage is equal to 2 / useful life = 40%. Thus, the useful life is 5 years (2 / 0.40). This question tested from Session 8, Reading 25, LOS f.

Question 78 - #96771 What is a companys equity if their return on equity (ROE) is 12%, and their net income is $10 million?A)$83,333,333.

B)$120,000,000.

C)$1,200,000.

Your answer: A was correct! One of the many ways ROE can be expressed is: ROE = net income / equity0.12 = $10,000,000 / equityEquity = $10,000,000 / 0.12 = $83,333,333This question tested from Session 8, Reading 28, LOS d.

Question 79 - #98071 A firms financial statements reflect the following: Net income $1,700,000

EBIT $2,900,000

Effective tax rate 35%

Interest payments $285,000

Common equity $3,100,000

Total assets $6,600,000

Preferred dividends paid $1,100,000

Weighted avg. shares outstanding 523,000

Based on this information, what is the firms basic EPS? A)$2.75.

B)$3.25.

C)$1.15.

Your answer: A was incorrect. The correct answer was C) $1.15. The firms basic EPS = ($1,700,000 $1,100,000) / (523,000) = $1.147. This question tested from Session 8, Reading 25, LOS g.

Question 80 - #97385 Johnson Corp. had the following financial results for the fiscal 2004 year:Current ratio 2.00

Quick ratio 1.25

Current liabilities $100,000

Inventory turnover 12

Gross profit % 25

The only current assets are cash, accounts receivable, and inventory. The balance in these accounts has remained constant throughout the year. Johnsons net sales for 2004 were: A)$300,000.

B)$1,200,000.

C)$900,000.

Your answer: A was incorrect. The correct answer was B) $1,200,000. The 25% GP indicates that the cost of goods sold is 75% of sales. The inventory is derived from the difference between current ratio and the quick ratio. The current ratio indicates that the current assets are $200,000 and the quick assets are $125,000. The difference represents the inventory of $75,000. The inventory turnover is used to obtain cost of goods sold of $900,000. The cost of goods sold is 75% of sales, indicating that sales are $1,200,000. This question tested from Session 8, Reading 28, LOS b.

Question 81 - #97972 The following information pertains to Bender, Inc., for last year: Net income of $25 million. 1 million shares of $10 par value preferred stock outstanding paying a 10% dividend. 50 million shares of common stock outstanding at the beginning of the year. Issued an additional 5 million shares of common stock on 7/1. What is Bender, Inc.s basic earnings per share (EPS)?A)$0.476.

B)$0.457.

C)$0.384.

Your answer: A was incorrect. The correct answer was B) $0.457. 50,000,000 common shares 12 months = 600,000,0005,000,000 common shares 6 months = 30,000,000 = 630,000,000630,000,000 / 12 = 52,500,000 average shares[$25,000,000(NI) $1,000,000(preferred dividends)] / 52,500,000 shares = $24,000,000 / 52,5000,000 = $0.457This question tested from Session 8, Reading 25, LOS g.

Question 82 - #97873 An analyst has gathered the following data about a company: Average receivables collection period of 37 days. Average payables payment period of 30 days. Average inventory processing period of 46 days. What is their cash conversion cycle?A)113 days.

B)53 days.

C)45 days.

Your answer: A was incorrect. The correct answer was B) 53 days. Cash conversion cycle = average receivables collection period + average inventory processing period payables payment period = 37 + 46 30 = 53 days.This question tested from Session 8, Reading 28, LOS b.

Question 83 - #97301 Information related to Bledsoe Corporations inventory, as of December 31, 2007, follows: Estimated selling price $3,500,000

Estimated disposal costs 50,000

Estimated completion costs 300,000

Original FIFO cost 3,200,000

Replacement cost 3,300,000

Using the appropriate valuation method, what adjustment is necessary to accurately report Bledsoes inventory at the end of 2007, and will this adjustment affect Bledsoes quick ratio?Adjustment Quick ratio

A)$50,000 write-down Yes

B)$50,000 write-down No

C)$100,000 write-up No

Your answer: A was incorrect. The correct answer was B) $50,000 write-down No

Inventories are valued on the balance sheet at the lower of cost or net realizable value. Net realizable value is equal to $3,150,000 ($3,500,000 selling price $300,000 completion costs $50,000 disposal costs). Since the original cost of $3,200,000 exceeds the net realizable value of $3,150,000, a $50,000 write-down is necessary. An inventory write-down has no impact on the quick ratio since inventory is excluded from both the numerator and denominator of the quick ratio.This question tested from Session 8, Reading 26, LOS g.

Question 84 - #97068 What is the net income of a firm that has a return on equity of 12%, a leverage ratio of 1.5, an asset turnover of 2, and revenue of $1 million? A)$360,000.

B)$40,000.

C)$36,000.

Your answer: A was incorrect. The correct answer was B) $40,000. The traditional DuPont system is given as:ROE = (net profit margin)(asset turnover)(leverage ratio)Solving for the net profit margin yields:0.12 = (net profit margin) (2) (1.5)0.04 = (net profit margin)Recognizing that the net profit margin is equal to net income / revenue we can substitute that relationship into the above equation and solve for net income:0.04 = net income / revenue = net income / $1,000,000 $40,000 = net income.This question tested from Session 8, Reading 28, LOS d.

Question 85 - #97983 Zichron, Inc., had the following equity accounts on December 31: Common stock:20,000 shares. Preferred stock A:10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year. Preferred stock B:10,000 shares, convertible to common on a 4 for 1 basis, dividend of $5,000 was declared during the year. The company reported net income of $120,000 and paid a $20,000 dividend to its common shareholders. Part 1)What are the basic earnings per share reported for the year? A)$2.75.

B)$2.00.

C)$3.75.

Your answer: A was incorrect. The correct answer was C) $3.75. ($120,000 40,000 5,000) / 20,000 shares = $3.75. This question tested from Session 8, Reading 25, LOS g.Zichron, Inc., had the following equity accounts on December 31: Common stock:20,000 shares. Preferred stock A:10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year. Preferred stock B:10,000 shares, convertible to common