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Practice Exam: TEXT

PART A Multiple Choice Questions


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1. On December 15, 2009, the board of directors of Cross Corporation declared a cash dividend,
payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares outstanding.
On December 15, 2009, Cross Corporation should
A. not prepare a journal entry because the event had no effect on the corporation's financial
position until 2010.
B. decrease retained earnings $1.6 million and increase expenses $1.6 million.
C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million.
D. decrease cash $1.6 million and decrease retained earnings $1.6 million.
2. The declaration and payment of a cash dividend
A. reduces retained earnings and increases liabilities by the amount of the dividend.
B. reduces retained earnings and increases contributed capital by the same amount.
C. reduces assets and increases liabilities by the amount of the dividend.
D. reduces both assets and retained earnings by the amount of the dividend.

30005 Accounting and Financial Statement Analysis

3.

Which of the following entries would be recorded when a company reissues 1,000 shares of
treasury stock for $40 per share when they were repurchased at a cost of $44 per share and
have a $1 par value?

A. Option A
B. Option B
C. Option C
D. Option D
4.

Which of the following journal entries is correct when common stock is initially issued for
cash at a price in excess of the stock's stated value?

A.

B.

C.

D.
5.

Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of
the following is true?
A. The investment would be accounted for using the equity method.
B. The investment would be accounted for by consolidation.
C. The investment would be accounted for under the market value method.
D. The investment would be accounted for under the amortized cost method.

30005 Accounting and Financial Statement Analysis

6.

Significant influence over the operating and financial policies of another company may be
indicated by
A. participation on its board of directors.
B. participation in its policy-making process.
C. evidence of material transactions between the two companies.
D. all of the above responses.

7.

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke
Corporation on January 1, 2010, at $40 per share as a long-term investment. The records of
Burke Corporation showed the following on December 31, 2010:

How much should Gilman Company report as investment income from the Burke investment
during 2010?
A. $230,000
B. $218,000
C. $12,000
D. $30,000
8.

On January 1, 2010, Entertainment Company acquired 15% of the outstanding voting stock of
Rocker Company as a long-term investment in available-for-sale securities. During 2010,
Rocker Company reported net income of $1,500,000 and dividends declared and paid of
$250,000. How much income will be reported during 2010 from the Rocker investment?
A. $225,000
B. $37,500
C. $187,500
D. $250,000

9.

Rice Company, a retailer, has provided the following information pertaining to its recent year
of operation:
Net income, $100,000;
Accounts receivable increased $9,000;
Prepaid insurance decreased $3,000;
Depreciation expense was $15,000;
Gain on sale of land, $2,000;
Wages payable decreased $7,000;
Unearned revenue increased $11,000.
How much was Rice's net cash inflow from operating activities?
A. $89,000
B. $115,000
C. $125,000
D. $111,000

30005 Accounting and Financial Statement Analysis

10.

KJ Company, a manufacturer, has provided the following information pertaining to its recent
year of operation:
Cash flow from operating activities, $136,000;
Accounts payable increased $11,000;
Prepaid assets decreased $8,000;
Depreciation expense was $12,000;
Accounts receivable increased $23,000;
Loss on sale of a depreciable asset was $6,000;
Wages payable decreased $9,000;
Unearned revenue decreased $19,000;
Patent amortization expense was $3,000.
How much was KJ's net income?
A. $185,000
B. $135,000
C. $147,000
D. $131,000

11.

Which of the following statements about the statement of cash flows is correct?
A. A company with a net loss on the income statement will always have a net cash outflow
from operating activities.
B. A purchase of equipment is classified as a cash inflow from investing activities.
C. Cash dividends received on stock investments are classified as cash flows from operating
activities.
D. Cash dividends paid are classified as cash flows from operating activities.

12.

Allen Company's 2010 income statement reported total revenues, $850,000 and total expenses
(including $40,000 depreciation) of $720,000. The 2009 balance sheet reported the following:
accounts receivablebeginning balance, $50,000 and ending balance, $40,000; accounts
payablebeginning balance, $22,000 and ending balance, $28,000. Therefore, based only on
this information, how much was the 2010 net cash inflow from operating activities?
A. $126,000
B. $166,000
C. $174,000
D. $186,000

13.

Teague Company's working capital was $40,000 and total current liabilities were 1/4 of that
amount. What was the current ratio?
A. 1
B. 3
C. 5
D. 7

30005 Accounting and Financial Statement Analysis

14.

Agnes Company reported the following data:

What was the inventory turnover ratio?


A. 2.2
B. 1.8
C. 2.0
D. 3.0
15.

Thomas Company had income before interest and taxes of $120,000. Interest expense for the
period was $17,000 and income taxes amounted to $28,500. The average stockholders' equity
was $680,000. What is Thomas' return on equity (ROE)?
A. 17.65%.
B. 15.15%.
C. 13.46%.
D. 10.96%.

30005 Accounting and Financial Statement Analysis

PART B- Exercises
Exercise 1:
On March 1, 2011, Young Company purchased the following stock as long-term investments in
available-for-sale securities:
Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares)
ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares)
XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares)
The market prices per share at December 31, end of the accounting period, were as follows:

Prepare the required journal entries at the following dates: March 1, 2011, December 31, 2011 and
December 31, 2012

30005 Accounting and Financial Statement Analysis

Exercise 2:
Below is the 2011 income statement for the Critters Corporation.

Additional Information:
Accounts receivable increased by $8,000
Merchandise inventory increased by $4,000
Accounts payable increased by $6,000
Prepaid expenses decreased by $2,000
Accrued liabilities decreased by $5,000
Interest payable increased by $1,000
Prepare the operating activities section of the statement of cash flows using the indirect method.

30005 Accounting and Financial Statement Analysis

Exercise 3
On January 1st, 2013, Company LittleComb ltd acquired a 90% stake in Company AllBald S.p.A.,
paying a price of 20,000. The balance sheet of AllBald at the date of the acquisition showed equity of
16,000. At the same date, the fair values of all assets and liabilities of AllBald coincided with their
book values, except for:
ASSET/LIABILITY

CARRYING AMOUNT

FAIR VALUE

Property

20,000

22,000

Brands

12,000

Provisions

3,000

5,000

Property is depreciated at a rate of 10%, while Brands are amortized at a 5% rate. The tax rate is equal
to 50%. Moreover, the following intercompany transactions took place during 2013:

LittleComb sells goods to AllBald for 12,000, making a profit of 4,000 on the sale. At year
end only 20% of this profit has been realized with third parties, with the related receivable is
entirely settled at year end;

The parent LittleComb grants funding to AllBald for 6,000, which is to be entirely repaid
(and it was) at year end together with interests of 400.

AllBald sells LittleComb a plant with a carrying amount of 10,000. The selling price is
12,000. LittleComb uses a depreciation rate of 10%, the same that AllBold would have used if
it did not sell the plant. The related invoice is paid at year end.

The FV of Non Controlling Interests is equal to 11,000.

AllBald distributes dividends for 2,000 (Please do not consider taxes on Dividends).

Make all the consolidation adjustments needed to build the consolidated financial statements of group
LittleComb-AllBald as of December 31th, 2013.

30005 Accounting and Financial Statement Analysis

Income Statement
Income Statement

LittleComb

AllBald

LC + AB

(1)

Operating revenues

32,000

18,000

50,000

Operating Expenses

19,200

8,400

27,600

Operating Income

12,800

9,600

22,400

1,200

-2,560

-1,360

14,000

7,040

25,040

Taxes

5,600

3,440

13,040

Net Income

8,400

3,600

12,000

Financial income and expenses


Income before taxes

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Consolidated

(3)

(4)

(5)

(6)

(7)

(8)

Consolidated

MI share of income

Balance Sheet
Balance Sheet

LittleComb

AllBald

LC + AB

(1)

30,800

20,000

50,800

2,000

1,000

3,000

20,000

20,000

Assets
Non current assets
Property, plant and equipment
Goodwill
Other Intangible Assets
Investments
Deferred tax assets
Current assets

(2)

Inventories

6,000

13,600

19,600

Receivables

12,000

2,000

14,000

5,600

5,000

10,600

76,400

41,600

118,000

Other assets
Total assets

Balance Sheet

LittleComb

AllBald

LC + AB

(1)

40,000

12,000

52,000

Retained earnings

2,000

2,000

4,000

Net income

8,400

3,600

12,000

5,000

3,000

8,000

Equity and liabilities


Owners' equity
Common stock

MI share of equity
Common stock and Retained earnings
Net income
Non current liabilities
Provisions
Deferred tax liabilities

400

400

Current liabilities
Trade and financial liabilities
Other liabilities
Total liabilities and equity

17,600

14,000

31,600

3,000

7,000

10,000

76,400

41,600

118,000

(2)

(3)

(4)

(5)

(6)

(7)

(8)

Consolidated

Exercise 4
Using the information provided below and selecting the appropriate ratios from the list, please
compare the two firms in terms of Profitability, Solvency and Liquidity. If you were given the
chance to ask for more information about the firms, what kind of information would you require?
Why?
INCOME STATEMENT (**)

($/millions)

EXPENSES
Cost of goods sold (*)
Employees compensation
Rent expenses
Maintenance expenses
Returns and allowances on
sales
Selling and admin
Provisions for uncollect.
Depreciation and amort.
Interest expenses
Income taxes

Firm 1 Firm 2
REVENUES
26.769
93.438 Merchandise sales
5.400
13.300 Interests on bonds
1.207
1.800
85
179

Net Income

570
2.646
1.000
786
1.409
912

1.840
3.079

1.188

3.526

1.000
862
2.115

ASSETS
Current assets
Cash and equivalents
Other receivables (short-t)
Accounts receivables (net)
Merchandise inventory
short-term pre-paid expenses

Firm 1
358
1,165
23,159
5,044
956

1,447
976
0
16,497
432

Total current assets


Long-term assets
Land
Buildings

30,682

19,352

487
5,420

Furniture and equipment


Transportation equipment
Accumulated depreciation
Long-term pre-paid expenses
Total long-term assets

TOTAL ASSETS

Firm 1 Firm 2
41.866
121.139
106

Firm 2

LIABILITIES + O.E.
Current liabilities
Short-term borrowings
Current portion of loans
Tax payable
Accounts payable
Unearned revenues

Firm 1

Firm 2

5,208
2,561
554
6,637
830

102
1,039
12,754
565

15,790

14,460

4,691
17,686

Total current liabilities


Long-term liabilities
Long-term debt
Postretirement benefits

13,071
3,977

9,674
2,747

4,919
498
-4,910
1,604

7,636
403
-6,810
2,426

Total long-term liabilities


TOTAL LIABILITIES
Common stock
Capital in excess of par value

17,048
32,838
323
1,381

12,421
26,881
224
585

8,018

26,032

Retained income
Net income

2,970
1,188

14,168
3,526

TOTAL O.E.

5,862

18,503

38,700

45,384

38,700

45,384

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TOTAL

RATIOS

Current Ratio: Current Assets / Current Liabilities

Quick Ratio : (Current Assets Inventory) / Current Liabilities

Cash Ratio : Cash and Cash Equivalents / Current Liabilities

Days Receivables = (Accounts Receivables / Sales )*365

Days Payables = (Accounts Payables / COGS)*365

Days Inventory = (Inventory / COGS)*365

Cash Cycle = Days Receivables + Days Inventory Days Payables

Debt to Assets Ratio = Total Liabilities / Total Assets

Debt to Equity Ratio = Total Liabilities / Equity

Financial Debt to Assets Ratio = (ST financial debt + LT financial debt) / Total Assets

ROE = (Net Income / Equity)

ROA = (Net Income / Total Assets)

ROS = (Net Income / Sales)

Assets Turnover = Sales / Total Assets

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