FULL NAME: Nguyen Ha Chau Ngan

CLASS: MC1805

MIDTERM

Ia/ You are analyzing the financial condition of a company to assess its ability to
meet upcoming loan payments. You compute its current ratio as 1.4. You also find
that a major portion of accounts receivable is due from one client who has not
made any payments in the past 12 months. Removing this receivable from current
assets lowers the current ratio to 0.9. What do you conclude?
Ans: Initially, the current ratio was 1.4, but when removing the accounts
receivable which is due from one client who has not made any payments in the past
12 months, the current ratio decreased to 0.9. This indicates that the company has
issues with collecting these accounts receivable, and this accounts receivable
comprise a significant portion of its assets. So, company’s debt-paying ability is
quite weak.
Ib/ Analyze the debt ratio of real estate companies?
Total liabilities
Debt ratio = Total assets

High debt ratio: A higher debt ratio may indicate a higher level of financial risk, as
the company may have a larger debt burden to service. This can make the company
more vulnerable to economic downturns, interest rate fluctuations, or changes in
the real estate market.
Low debt ratio: a lower debt ratio may suggest a more conservative approach to
financing and lower financial risk. However, excessively low debt ratios might also
indicate underutilization of leverage and missed growth opportunities.
IIa/ Multiple choice
1/ Inventory accounts should be classified in which section of a balance sheet?
a. Current assets
b. Investments
c. Intangible assets
d. Tangible assets
e. Non-current equity
2/ Costs included in the Merchandise Inventory account can include:
a. Invoice price minus any discount, Transportation-in, Storage, Insurance
b. Invoice price plus any discount, Transportation-in, Storage, Insurance
c. Invoice price minus any discount, Transportation-out, Storage, Insurance
d. Invoice price minus any discount, Transportation-in, cost of good sold
e. All of these
3/ The operating activities of a business exclude:
a. Borrowing.
b. Purchasing.
c. Marketing.
d. Distribution.
e. All of these.
4/ Which of the following will be presented in a direct Cashflow Statement?
a. Depreciation expense
b. Decreases in Prepaid expenses
c. Loss in disposal of asset
d. Cash paid to suppliers
e. Increases in account payable
5/ If a company had $15,000 in net income for the year, and its sales were $300,000 for
the same year, what is its profit margin? a. 20% c. $285,000 e. 5% b. 2,000% d. $315,000

IIb/ Fill in the blanks

NIKITA COMPANY

For Year Ended December 31

Key Figures 2008 2009 2010
Cost of goods $ 623,000 $ 955,000 $ 780,000
sold
Net income 230,000 275,000 250,000
Total current
assets 1,247,000 1,360,000 1,230,000
Total equity 1,387,000 1,580,000 1,245,000

Inventory errors:
Understated December 31, 2008 $ 56,000
Overstated December 31, 2009 $ 25,000

NIKITA COMPANY
Adjustments for to Correct Inventory Errors

Cost of goods sold: 2008 2009 2010

Reported amount $ 623,000 $ 955,000 $ 780,000
Adjustments for:
12/31/2008 error (56,000) 56,000

12/31/2009 error 25,000 (25,000)

$ 567,000 $ 1,036,000 $ 755,000
Corrected ………….. …………… …………..

Net income: 2008 2009 2010

Reported amount $ 230,000 $ 275,000 $ 250,000
Adjustments for:
12/31/2008 error 56,000 (56,000)

12/31/2009 error (25,000) 25,000

$ 286,000 $ 194,000 $ 275,000
Corrected ………….. …………… …………..

Total current assets: 2008 2009 2010

Reported amount $ 1,247,000 $ 1,360,000 $ 1,230,000
Adjustments for:
12/31/2008 error 56,000

12/31/2009 error (25,000)

 $ 1,303,000 $ 1,385,000 $ 1,230,000
Corrected ………….. …………… …………..

Equity: 2008 2009 2010

Reported amount $ 1,387,000 $ 1,580,000 $ 1,245,000
Adjustments for:
12/31/2008 error 56,000

12/31/2009 error (25,000)

$ 1,443,000 $ 1,225,000 $ 1,245,000
Corrected ………….. …………… …………..

2. What is the error in total net income for the combined three-year period
resulting
from the inventory errors? Explain

In the consecutive 3 accounting periods, 2 inventory errors for the years 2008 and 2009
were not corrected, resulting in errors in the net income for all 3 years: 2008, 2009, and
2010.
2008:
Cost of goods sold – $56,000 (Understated December 31, 2008: $56,000)
 Net income + $56,000 (Cost of goods sold has an inverse relationship with net
income)
2009:
Cost of goods sold + $56,000 + $25,000 (Overstated December 31, 2009: $25,000, and
when calculating the 2009 accounting period, the inventory error from 2008 was not
adjusted)
 Net income – $56,000 – $25,000
2010:
Cost of goods sold – $25,000 (When calculating the 2010 accounting period, the
inventory error from 2009 was not adjusted)
 Net income + $25,000

3. Explain why the understatement of inventory by $56,000 at the end of

2008
results in an understatement of equity by the same amount in that year.

The understatement of inventory by $56,000 at the end of 2008 that requires a

downward adjustment of $56,000, it means that the asset account will also decrease by
$56,000. Therefore, we have: Equity = Assets - Liabilities.
 Equity will decrease by $56,000.