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1. (TCO A) Which of the following is an advantage of the sole proprietorship relative to the corporate form
of business organization? (Points : 5)

Limited liability of investor

Transferability of ownership
Simple to establish
Unlimited life

2. (TCO A) Dividends _____. (Points : 5)

represent an expense and are an operating activity

represent an obligation and are an operating activity
represent a distribution of earnings and are a financing activity
represent an asset and are an investing activity

3. (TCOs A, B) Below is a partial list of account balances for LBJ Company:

Cash
$15,000
Prepaid insurance
5,000
Accounts receivable 2,500
Accounts payable
3,000
Notes payable
6,000
Common stock
10,000
Dividends
500
Revenues
15,000
Expenses
13,000
What did LBJ Company show as total debits?
(Points : 5)

$34,000
$36,000
$70,000

$31,000

4. (TCOs B, E) Why is the accrual basis of accounting preferred by GAAP? (Points : 5)

The Accrual basis is easier to use.

The Accrual basis is also preferred by the Internal Revenue Service.
The Accrual basis complies with the revenue recognition and matching principles.
The Accrual basis requires fewer accounting resources.

5. (TCO D) In a period of increasing prices, which inventory cost flow assumption will result in the highest
amount of net income?(Points : 5)

LIFO
The average cost method
FIFO
Income tax expense for the period will be the same under all assumptions.

6. (TCOs A, E) Equipment was purchased for $75,000 on January 1, 2011. Freight charges of $3,200

were incurred and there was a cost of $6,000 for installation. It is estimated the equipment will have a
$12,000 salvage value at the end of its 5-year useful life. Depreciation expense for 2011 using the
straight-line method will be _____. (Points : 5)
$13,800
$14,440
$12,600
$13,240

7. (TCO D,G) Payne Corporation issues 100 twenty-year, 6%, $1,000 bonds dated July 1, 2010, at 94.
The journal entry to record the issuance will show a _____. (Points : 5)

debit to Cash of $100,000

credit to Bonds Payable of $94,000

credit to Premium on Bonds Payable of $4,000

debit to Discount on Bonds Payable of $6,000

8. (TCO C) Accounts receivable arising from sales to customers amounted to $80,000 and $100,000 at

the beginning and end of the year, respectively. Income reported on the income statement for the year
was $1,000,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to
be reported on the statement of cash flows is _____. (Points : 5)
$20,000
$1,020,000
$1,000,000
$980,000

9. (TCO F) If you are making comparisons within a company to detect changes in financial relationships
and significant trends, you are performing what type of analysis? (Points : 5)

Industry averages analysis

Intercompany analysis
Common-size analysis
Intracompany analysis

10. (TCO F) The formula for performing horizontal analysis is _____. (Points : 5)

(Current Year Amount minus Base Year Amount) divided by Current Year Amount
Base Year Amount divided by Current Year Amount
Current Year Amount minus Base Year Amount
(Current Year Amount minus Base Year Amount) divided by Base Year Amount

11. (TCO F) Horizontal analysis is a technique for evaluating a series of financial statement data over a
period of time _____.(Points : 5)

that has been arranged from the highest number to the lowest number

that has been arranged from the lowest number to the highest number
to determine which numbers are in error
to determine the amount and/or percentage increase or decrease that has taken place

12. (TCO F) A common measure of liquidity is _____. (Points : 5)

debt-to-total-assets ratio
cash debt coverage
free cash flow
working capital

13. (TCO F) Short-term creditors would be most interested in which of the following ratios? (Points : 5)

Average collection period

Times interest earned
Cash debt coverage
Free cash flow

14. (TCO G) To calculate the market value of a bond, we need to _____. (Points : 5)

multiply the bond price times the interest rate

calculate the present value of the principal only
calculate the present value of the interest only
calculate the present value of both the principal and

1. (TCO A) Use the following partial financial statement information below to calculate the
liquidity and profitability ratios. This information can be used to correctly solve each of the
ratios below.

Average common shares outstanding

Capital expenditures

35,000
$20,000

Current liabilities
Net income

$50,000
$100,000

Cash provided by operations

$77,000

Net sales

Preferred stock dividends paid

$30,000

Total liabilities

Current assets

$20,000

$25,000

Total assets

$50,000
$80,000

Instructions: Compute the following.

a) Current ratio
b) Working capital
c) Earnings per share
d) Debt-to-total-assets ratio
e) Free cash flow

To earn full credit, you must show the formula you are using, show your computations, and
explain the meaning of each of your ratio results. (Points : 30)

Metric

Formula Used

Figur
e
0.8x

Current
Ratio

Current Assets
Current Liabilities

Working
Capital

Current AssetsCurrent Liabilities

$5,00
0

Earnings
per share

Net IncomePreferred Dividends

Number of Common Shares

$0.57
a
share

Indication
This means that the
firm will have a hard
time paying off its
current liabilities if
the need arises.
This means that the
firm cannot continue
its operations without
facing many
obligations.
This means that
investors are earning
$0.57 per share

owned.
Debt to
total
assets
ratio
FCF

( Total Debt )
Total Assets

0.625

Cash by operationsCapital exp .

$57,0
00

This means the

companys capital
structure relies so
much on debt
This tells us that the
company has $57,000
cash to be used.

2. (TCO D) The Oxford Company has budgeted sales revenues as follows.

Oct

Nov

Dec

Credit sales

$120,000

$96,000

$72,000

Cash sales

72,000

204,000

156,000

Total sales

192,000

300,000

228,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and
the remaining 40% will be collected in the following month. Purchases of inventory are all on
credit, with 60% paid in the month of purchase and 40% in the month following purchase.
Budgeted inventory purchases are $260,000 in October, $180,000 in November, and $84,000 in
December.

Other budgeted cash receipts include (a) the sale of plant assets for $49,400 in November and (b)
the sale of new common stock for $67,400 in December. Other budgeted cash disbursements
include (a) operating expenses of $27,000 each month, (b) selling and administrative expenses of
$50,000 each month, (c) dividends of $76,000 to be paid in November, and (d) purchase of
equipment for $24,000 cash in December.

The company has a cash balance of $40,000 at the beginning of December and wishes to
maintain a minimum cash balance of $40,000 at the end of each month. An open line of credit is
available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is
done on the first day of the month in which financing is needed and that all repayments are made
on the last day of the month in which excess cash is available. Also assume that $14,000 of
financing was obtained on November 1.

Requirements: Use this information to prepare a schedule of expected cash payments for
purchases of inventory for the months of November and December only.

This question does not require creation of an entire cash budget so please only create the
schedule that is asked for in the question because otherwise you will be wasting valuable time.

(Points : 30)

Beginning Cash Balance

Dec
Nov
$32,00 $40,00
0
0

Cash Receipts:
Cash sales
Collection of Sales
Sale of Plant
Sale of Stocks

$204,0
00
$105,6
00
$49,40
0
$0

$156,0
00
$81,60
0
$0
$67,40
0

Cash Disbursements:
Payment of Purchases
Operating Expenses
S&A Expenses
Dividends

($212,0
00)
($27,00
0)
($50,00
0)
($76,00

($122,4
00)
($27,00
0)
($50,00
0)
$0

0)
Equipment Purchase

$0

Interest Payments

$0

($24,00
0)
($1,680
)

Borrowing

$14,00
$0
0

Ending Balance

$40,00
0

$119,9
20

3. (TCOs B, E) The following items are taken from the financial statements of Lansing Company
for 2010.

Accounts payable
$16,500
Accounts receivable
25,500
Accumulated depreciation
12,600
Bonds payable
35,000
Cash
55,000
Common stock
75,000
Cost of goods sold
53,000
Depreciation expense
6,300
Dividends
5,300
Equipment
35,000
Interest expense
4,300
Patents
6,500
Retained earnings, January 1
80,000
Salaries expense
42,000
Sales revenue
115,000
Supplies
3,500

Instructions: Prepare an income statement and a retained earnings statement for Lansing
Company. (Points : 30)
Lansing Company
Income Statement
Sales Revenue
Cost of Goods
Sold

$115,0
00
($53,00
0)

Gross Margin
Salaries
Expense
Depreciation
Expense
Interest
Expense
Net Income

$62,00
0
($42,00
0)
($6,300
)
($4,300
)
$9,400

Lansing Company
Statement of Retained
Earnings
Beginning Retained
Earnings
Add: Net
Income
Less: Dividends
Paid
Ending Retained Earnings

$80,0
00
$9,40
0
($5,30
0)
$89,4
00

4. (TCO D) Your friend James has hired you to evaluate the following internal control
procedures.

a) Explain to your friend whether each of the numbered items below is an internal control
strength or weakness. You must also state which principle relates to each of the internal controls.
b) For the weaknesses, you also need to state a recommendation for improvement.

Everyone has access to the petty cash fund.

Cash register codes are assigned to each cashier.
The treasurer is the only one allowed to sign checks.
Supervisors count cash receipts daily.
The treasurer approves of the purchases and makes the payment because he is familiar with the
purchases.

(Points : 30)
Control
Everyone has access to
the petty cash fund
Cash register codes are
assigned to each
cashier.
The treasurer is the only
one allowed to sign
checks.
Supervisors count cash
receipts daily.
The treasurer approves
of the purchases and
makes the payment
because he is familiar
with the purchases.

Principle
Proper authorization

Type
Weakness

Segregation of duties

Strength

Proper Authorization

Strength

Independent checks

Strength

Proper Authorization

Weakness

b.) For the weaknesses, it is wise to limit the access to the petty cash funds, and instead designate
a number of authorized people to have access into it. If everyone has access to the petty cash
fund, then there is a high risk of running into fraud or theft. Also, it is not an adequate reason to
let the treasurer approve the purchases just because he is familiar with them. A thorough analysis
should be taken into consideration, and the treasurer should be accompanied with another
authorized employee with regards to making approvals of this kind.

5. (TCOs D, E) Please prepare the following journal entries. Indicate which account should be
debited with the abbreviation DR in front of the account name and which account should be
credited with the abbreviation CR in front of the account name along with the dollar amount of
the debit and credit.

a) Investors invested $150,000 in exchange for 10,000 shares of common stock.

b) Company made payment on account for $10,000
c) Company received $15,000 for services not yet performed
d) Company purchased $7,500 worth of equipment

e) Company billed $5,000 for services performed (Points : 30)

a.) Cash DR $150 ,000

Common Stock CR $150,000

b.) Accounts Payable DR $10,000

Cash CR $10,000
c.) Cash DR $15,000

Unearned Revenue CR $15,000

d.) Equipment DR $7,500

Cash CR $7,500
e.) Accounts Receivables DR $5,000

Service Revenue CR $5,000

6. (TCO C) Please indicate which section of the statement of cash flows should contain each of
the following items and whether each item would result in an inflow or outflow of cash. The
sections are Operating, Investing, and Financing.

a) Depreciation of equipment
b) Increase in accounts payable
c) Sold a building at book value
d) Payment of dividends
e) Increase in inventory (Points : 30)

Event

Section

Result

Depreciation of
equipment
Increase in accounts
payable
Sold a building at book
value
Payment of dividends
Increase in inventory

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Operating

Inflow

Operating

Inflow

Investing

Inflow

Financing
Operating

Outflow
Outflow