Quesfions I to 20: Select the best answer to each question. Note that a question and its answers may be split across a page
brealr, so be sure that you have seen the entire question and, all the answers before choosing an answer.
L. Centerville Company’s debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are
$170,000, and working capital is $80,000. Centerville’s long-term liabilities must be
A. $30,000.
B. $90,000.
c. $80,000.
D. $120,000.
Use the following information to answer this question.
The most recent balance sheet and income statement of Teramoto Corporation appear below:
Ending
Beginning
Balance
Balance
$43
53
$35
59
73
Comparative Balance Sheet
69
490
Assets:
Cash and cash equivalents
Accounts receivable
lnventory
Plant and equipment
Less accumulated depreciation
Total assets
582
301
$4s0
Liabilities and stockholders’ equity
M
W
– $s7
$48
2l
Accounts payable
Wages payable
Taxes payable
Bonds payable
Deferred taxes
Common stock
18
15
13
2t
20
20
2t
55
Retained earnings
Total liabilities and stocktolders’ equity
50
26r
t97
$450
$367
Income Statement
Sales
Cost of good sold
Gross margin
Selling and administative expense
Net operating income
Income taxes
s893
587
306
189
117
35
Net incoine
s82
&
Cash dividends were $18.
2. The net cash provided by (used by) financing activities for the year was
A. ($18).
B. ($12).
c.
$s.
D. $1.
3, A weakness of the intemal rate of retum method for screening invesfinent projects is that
it
A. implicitly as$unes that the company is able to reinvest cash flows from the project at the intemal rate of return.
B. implicitly
assumes that the company is able to reinvest cash flows from the project at the company’s discount rate.
C. doesn’t consider the time value of money.
D. doesnt take into account all of the
cash flows from a project.
4. (Ignore income tanes in this problem.) The following data pertain to an investnent:
inveshnent
Life ofthe project
Annual cost savings
Estimated salvage value
Discount rate
Cost of the
$18,955
5 years
$5,000
$1,000
l0%
The net present value of the proposed investment is
A. s(3,430).
B. $621.
c. $3,355.
D. $0.
5. Which of the following would be classified as a financing activity on the statement of cash flows?
A. Dividends paid to shareholders of the company on the company’s common stock
B. Dividends received on invesfinents in another company’s common stock
C. lnterest received on investnents in another company’s bonds
D, Interest paid on bonds issued by the reporting company
6. The net present value method assumes that the project’s cash flows are reinvested at the
A. intemal rate of retum.
B. simple rate of return.
C. discount rate used in the net present value calculation.
D. payback rate of return.
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 and Year
(dollars in thousands)
Year2
Year I
$180
$180
2t0
180
Inventory
130
120
Prepaid expenses
50
574
530
1.540
1.480
$2,110
$2,010
Current assets:
Cash and marketable securities
Accounb receivable, net
Total current assets
Noncurrent assets:
Plant & equipment, net
Total assets
50
Cunent liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total cunent liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stoch $20 par, l0%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stocktolders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250
480
$130
60
120
310
730
500
810
na
120
180
180
240
840
244
660
L2A0
s2.010
1.380
$2.110
Larkins Company
Income Statement
For the Year Ended December 3l,Year 2
(dollars in thousands)
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (3fflo)
Net income
$2,760
1"930
830
330
500
50
450
135
$3ls
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
7. Larkins Company’s dividend payout ratio for Year 2 was closest to:
4.42.9%
8. t4.8%
c.40.6%
D.24.6%
8. Britfinan Corporation makes three products that use the current constraint-a particular type of machine.
Data concerning those products appear below:
Selling price per unit
Variable cost per unit
Minutes on the consfraint
IP
$183.57
s144.42
2.90
NI
92A7.74
$155.04
3.40
YD
$348.1s
S26e.s0
5.s0
Assume that suffrcient constaint time is available to satisS demand for all but the least profitable product.
Up to how much should the company be willing to pay to acquire more of the consffained resource?
A. $15.50 per minute
B. $13.50 per minute
C. $78.65 per unit
D. $39.15 per unit
9. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 units of this part
are produced and used every year. The companfs Accounting Deparfinent reports the following costs of
producing the part at this level of activity:
Psr Unit
materials
Direct labor
Direct
overhead
Supervisor’s salary
Depreciation of special equipment
Allocated general overhead
Variable manufacturing
$2.20
$8.50
$1.30
$5.80
$7.20
S4.60
An outside supplier has offered to make the part and sell it to the company for $24.50 each. If this offer is
accepted, the supervisols salary and all of the variable costs, including the direct labor, can be avoided.
The special equipment used to make the part was purchased many years ago and has no salvage value or
other use. The allocated general overhead represents fixed costs of the entire company, none of which
would be avoided if the part were purchased instead of produced internally. In addition, the space used to
make part N19 could be used to make more of one of the company’s other products, generating an
additional segment margin of $25,000 per year for that product. What would be the impact on the
company’s overall net operating income of buying part N19 from the outside supplier?
A- Net operating income would decline by $10,700 per year.
B. Net operating income would decline by $60,700 per year.
C. Net operating income would decline by $21,900 per year.
D. Net operating income would increase by $25,000 per year.
10. (Ignore income tares in this problem.) The Keego Company is planning a $200,000 equipment
investment that has an estimated five-year life with no estimated salvage value. The company has projected
the following annual cash flows for the investment:
Year
I
Cash Inflows
$120,000
2
60,000
3
40,000
4
40,000
5
40.000
Total
5300,000
Assuming that the cash inflows occur evenly over the year, the payback period for the invesfinent is
years.
A.4.91
B.2.50
c.
1.67
D.0.75
11. Cridwell Company’s selling and administrative expeffies for last year totaled $210,000. During the year,
the company’s prepaid expense account balance increased by $18,000, and accrued liabilities increased by
$12,000. Depreciation charges for the year were S24,000. Based on this information, selling and
adminisfrative expenses adjusted to a cash basis under the direct method on the statement of cash flows
would be
A. $192,000.
B. $180,000.
c.
$240,000.
r). $228,000.
12. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300
but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental
effect on the company’s overall profit of reworking and selling the material rather than selling it as is as
as is,
scrap?
A. $11,900
B. -$7,600
c.
-$1,400
D. -$20,900
13. An increase in the market price of a company’s common stock will immediately affect its
A. dividend payout ratio.
B. debt-to-equity ratio.
C. dividend yield ratio.
D. earnings per share of common stock.
14. Kava Inc, manufactures industial components. One of its products, which is used in the construction
of industrial air conditioners, is known as K65. Data concenring this product are given below:
Per Unit
Selling
price
$180
Direct materials
$29
Direct labor
$s
Variable manufacturing overhead
$4
Fixed manufacturing overhead
$21
Variable selling expense
$2
Fixed selling and administrative expense
$17
The above per unit data are based on annual production of 4,000 units of the component. Direct labor can
be considered to be a variable cost. (Source: CMA, adapted)
The company has received a special, one-time-only order for 500 units of component K65. There would
be no variable selling expense on this special order, and the total fixed manufacturing overhead and fixed
selling and adminisfrative expenses of the company wouldn’t be affected by the order. Assuming that Kava
has excess capacity and can fill the order without cutting back on the production of any product, what is
the minimum price per unit on the special order below which the company shouldn’t go?
A. $38
B. $78
c. $59
D. $180
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 oadYear
(dollars in thousands)
1
Year2
120
530
1.480
$2,110
Total assets
180
1.540
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment net
$180
210
50
570
Inventory
$180
130
Current assets:
Cash and mmketable securities
Accounts receivable, net
Year I
$2,010
i0
Cunent liabilities:
Accounts payable
Accrued liabilities
Notes payable, short tenn
Total current liabilities
Noncurrent liabilities
250
$130
60
120
310
480
ru
$100
60
90
:
Bonds payable
730
Total liabilities
Stoc*holders’ equity:
Preferred stock, $20 par,
Common stock, $10 par
l0%
810
120
120
180
180
Additional paid-in capital–common
stock
earnings
stockholders’equity
Total liabilities & stoctholders’equity
Retained
Total
240
840
138q
$2.110
240
660
1.?00
$2.01Q
Larkins Company
Income Statement
For the Year Ended December
(dollars in thousands)
3l,Year
2
Sales (all on account)
$2,760
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
1.930
830
330
500
50
450
15
lncome taxes (30%)
Net income
$3ls
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were prefered dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
15, Larkins Company’s price-earnings ratio on December 31, Year 2 was closest to:
A.8.91
8.20.79
c.8.57
D.6.00
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 andYear
(dollars in thousands)
1
Year
Current assets:
Cash and marketable
Accounts receivable,
securities
net
Inventory
Prepaidexpenses
Total current assets
Noncurrent assets:
Plant & equipmen!
Total
assets
Current liabilities:
Accounts payable
net
2
$180
2lO
130
5P
570
1.540
$2,110
$100
Year I
$180
180
120
50
530
1.480
$2,010
$130
Accruedliabilities
Notes payable, short term
Total cunent liabilities
60
90
250
60
120
310
480
730
500
810
120
180
240
840
1.380
$2.110
120
Noncurrent liabilities:
Bondspayable
Total liabilities
Stockholders’ equity:
$20par,10%
par
stock
Retained earnings
Total stockholders’equity
Total liabilities & stockholders’equity
Preferredstock,
Common stoclg $10
Additional paid-in capital–common
180
240
66q
1.200
$2.010
Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)
s2,760
Cost of goods sold
Gross margin
Selling and administative sxp€nse
Net operating income
Interest expense
Net income before taxes
Income taxes (307o)
Net income
1.930
830
310
500
50
450
135
$315
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
16. Larkins Company’s return on total assets for Year 2 was closest to:
L. r53%.
B.17.Oo/o.
c.16.0%.
D.l3.6Yo.
.
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 and Year
(dollars in thousands)
1
Year
Current assets:
Cash and marketable
Accounts receivable,
securities
net
2
$180
2t0
Year I
$180
180
hventor]
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment net
Total assets
130
120
50
570
s30
1.540
1.480
$2,110
$2,010
50
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
$100
60
90
250
480
500
730
810
120
120
180
180
240
840
Retained earnings
Total stockholders’ equity
Total liabilities & stockfiolders’ equity
$130
60
120
310
240
660
1"380
1.200
$2.110
$2.010
Larkins Company
lncome Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expeilse
Net operating income
Interest expense
Net income before taxes
Income taxes (307o)
Net income
$2,760
1.930
830
330
500
50
450
135
$31s
Dividends furing Year 2 totaled $135 thousando of which S12 thousand were prefered dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
17. Larkins Company’s return on corlmon stocl<holders’equity for Year 2 was closest ta:
A.25.9%.
8.23.5%.
c.24.4%.
D.26.90/o.
18. Fonics Corporation is considering the following three competing invesfinent proposals:
Inifi al ilvestnent required
Aye
Bee
$62,000 $74,000
Cee
$95,000
$10,000 $8,000
15%
L7%
Net present value
Internal rate ofrehnn
$12,000
t8%
Using the project profitability index, how would the above invesfrnents be ranked (hrghest to lowest)?
A. Cee, Bee, Aye
B. Aye, Cee, Bee
C. Bee, Cee, Aye
D. Aye, Bee, Cee
19. A project profitability index greater than zero for a project indicates that
.d
the compauy should reevaluate its discount rate.
B. the project is unatfiactive and shouldnt be pursued.
C. there has been a calculation error.
D. the discount rate is less than the internal rate of return.
20. Ignore income tanes in this problem.) Purvell Company has just acquired a new machine. Data on the
machine follow:
Purchase
cost
$50,000
Annual cost savings $15,000
Life of the machine 8 years
The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage
value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.
The simple rate of return would be closest ta
A.30.0%.
B. 18.75%.
c.17.5%.
D.12.5%.
End ofexam
