ACCT 504 Final Exam 2

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ACCT 504 Final Exam 2

(TCO A) Which one of the following is an advantage of corporations relative to partnerships and sole proprietorships? (Points : 5)

Reduced legal liability for investors
Harder to transfer ownership
Lower taxes
Most common form of organization

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

is increased with a debit
is decreased with a credit
is not an expense account
All of the above

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

Cash                          $10,000
Prepaid insurance           1,000
Accounts receivable        5,000
Accounts payable           4,000
Notes payable                6,000
Common stock               2,000
Dividends                       1,000
Revenues                     30,000
Expenses                     25,000

What did Kerner Company show as total credits? (Points : 5)


4. (TCOs B, E) A small and private company may be able to justify using a cash basis of accounting if it has _____. (Points : 5)

sales under $1,000,000
no accountants on staff
insignificant receivables and payables
all sales and purchases on account

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

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

6. (TCOs A, E) Equipment with a cost of $192,000 has an estimated salvage value of $18,000 and an estimated life of 4 years or 12,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? (Points : 5)


7. (TCOs D, G) Joyce Corporation issues 1,000 ten-year, 8%, $1,000 bonds dated January 1, 2007, at 102. The journal entry to record the issuance will show a _____. (Points : 5)

debit to Cash of $1,020,000
debit to Discount on Bonds Payable for $20,000
credit to Bonds Payable for $1,020,000
credit to Cash for $1,000,000

8. (TCO C) Accounts receivable arising from sales to customers amounted to $40,000 and $35,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $110,000. 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)


9. (TCO F) If you are comparing the 2010 income statement numbers with the income statement numbers from 2009 and 2008, you are conducting a _____. (Points : 5)

common-size analysis
horizontal analysis
vertical analysis
ratio analysis

10. (TCO F) Vertical analysis is also known as _____. (Points : 5)

perpendicular analysis
common-size analysis
trend analysis
straight-line analysis

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11. (TCO F) Which one of the following is not a characteristic generally evaluated in ratio analysis? (Points : 5)

Marketability of the product

12. (TCO F) Short-term creditors are usually most interested in assessing _____. (Points : 5)


13. (TCO F) Long-term creditors are usually most interested in evaluating _____. (Points : 5)


14. (TCO G) The present value of a bond is a function of which factors below? (Points : 5)

The market interest rate
The length of time until the amounts are received
The dollar amounts to be received
All of the above


  1. (TCO F) Please review the following real-world ratios for Johnson & Johnson and Pfizer for the year ended 2012 and address the 2 questions below.
Ratio NameJohnson & JohnsonPfizer
Profit margin16.1%24.7%
Inventory turnover ratio3.11.7
Average collection period59.4 days69.1 days
Cash debt coverage ratio.27.16
Debt to Total assets46.6%127.5%


1)     Please explain the meaning of each of the Pfizer ratios above.

2)     Please state which company performed better for each ratio.


TCO D) You are CFO of Goforit, Inc., a wholesale distribution company specializing in emerging technologies.  Your CEO is a brilliant marketer, but relies on you to explain issues and choices in accounting and finance.  She has heard from other members of a CEO organization to which she belongs that a company’s net income can vary widely depending on which accounting choices are made from the “GAAP menu.”

Assuming the goal is to maximize net income, choose an accounting treatment from each of the following scenarios, and explain to your CEO why the choice will produce the desired effect on reported Net Income for the current year.  Include in your answer the effect of the choice on both the income statement and balance sheet.


  1. Goforit carries significant electronics inventory in a competitive environment where prices are actually falling.   Which inventory valuation method would you choose—LIFO, FIFO, or average cost?  Assume that unit purchases exceed unit sales.b. Goforit has a large investment in warehouse equipment including conveyor belts, forklifts, and automated packaging systems.  Which depreciation method would you choose:  Straight line (SL) or double declining balance (DDB)?




. (TCO C) Please review the following real-world Hewlett Packard Statement of Cash flows and address the 2 questions below:

Cash flow from operating activitiesIn millionsIn millions
For the year ended 2012For the year ended 2011
Net (loss) earnings$(12,650)$7,074
Depreciation and amortization5,0954,984
Impairment of goodwill and purchased intangible assets18,035885
Stock-based compensation expense635685
Provision for doubtful accounts14281
Provision for inventory277217
Restructuring charges2,266645
Deferred taxes on earnings(711)166
Excess tax benefit from stock-based competition(12)(163)
Other, net265(46)
Accounts and financing receivables1,269(227)
Accounts payable(1,414)275
Taxes on earnings(320)610
Other assets and liabilities(2,356)(293)
Net cash provided by            operating activities10,57112,639
Cash flows from investing activities:
Investment in property, plant, and equipment(3,706)(4,539)
Proceeds from sale of property, plant, and equipment617999
Purchases of available-for-sale securities and other investments(972)(96)
Maturities and sales of available-for-sale securities and other investment66268
Payments in connection with business acquisitions, net of cash acquired(141)(10,480)
Proceeds from business divestiture, net8789
Net cash used in investing        activities(3,453)(13,959)
Cash flow from financing activities:
(Payments) issuance of commercial paper and notes payable, net(2,775)(1,270)
Issuance of debt5,15411,942
Payment of debt(4,333)(2,336)
Issuance of common stock under employee stock plans716896
Repurchase of common stock(1,619)(10,117)
Excess tax benefit from stock-based compensation12163
Cash dividends paid(1,015)(844)
Net cash used in financing activities(3,860)(1,566)
Increase (decrease) in cash and cash equivalents3,258(2,886)
Cash and cash equivalents at beginning of period8,04310,929
Cash and cash equivalents at end of period$11,301$8,043


1)     Please calculate the percentage increase or decrease in cash for the total line of the operating, investing, and financing sections bolded above and explain the major reasons for the increase or decrease for each of these sections.

2)     Please calculate the free cash flow for 2012 and explain the meaning of this ratio.


(TCO B) The following selected data was retrieved from the Wal-Mart, Inc. financial statements for the year ending January 31, 2013:


Accounts Payable$38,080
Accounts Receivable6,768
Common Stock3,952
Cost of Goods Sold352,488
Income Tax Expense7,981
Interest Expenses2,064
Membership Revenues3,048
Net Sales466,114
Operating, Selling and Administrative Expenses88,873
Retained Earnings72,978


Using the information provided above:
1. Prepare a multiple-step income statement
2. Calculate the Profit Margin, and Gross profit rate for the company. Be sure to provide the formula you are using, show your calculations, and discuss your findings/results.

(Points : 36)



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