Quiz 1

PAGE 1 ROSS SCHOOL OF BUSINESS UNIVERSITY OF MICHIGAN ACCOUNTING 501 PRINCIPLES OF FINANCIAL ACCOUNTING Quiz 1 WINTER 2006 Name: (Print) Please print your name above. The quiz is closed-book, closed-notes. You may use a calculator. You will have 90 minutes to complete the quiz. Do your own work. Read each question carefully. If you feel an assumption must be made in a problem, state your assumption in your solution, and it will be considered in grading the exam. Note: You must show all of your work in Problems II. and III. to receive full credit. Also, clearly identify your final answers to those problems. Point Distribution Problem Points Possible Points Earned I. Multiple Choice 30 _____ II. Transactions Analysis 25 _____ III. Account Analysis 45 _____ 100 ______ At the conclusion of the 90-minute quiz period, please read and sign the statement of compliance with the Business School Honor Policy. Business School Honor Policy: We, the members of the Business School community --- students, faculty, and staff --- commit ourselves to do our work and perform our duties honestly. We understand that in striving for excellence in performance, our personal and institutional integrity is our most precious asset; and accordingly, we will not knowingly act in ways that erode our integrity. Because we are an academic community, honesty in our academic work is vital. Therefore, we pledge neither to cheat nor to tolerate cheating. I acknowledge that I have been directed to work individually on this quiz. I certify that I have neither given nor received prohibited aid on this quiz. Signed _______________________________________________ Problem I: Multiple Choice (3 points each; 30 points total) For each question, choose the most correct answer. 1. A business had the following activities in January 2006: borrowed $500,000 from a bank; purchased $250,000 of merchandise on account from a supplier; issued new shares of stock for $1,500,000; and sold merchandise on account to customers for $320,000 (cost of goods sold was $196,000). Which categories of business activities are included in this list? a. Financing, investing, and operating activities b. Financing and investing activities only c. Investing and operating activities only d. Financing and operating activities only e. Operating activities only 2. Crane Company?s statement of cash flows shows an ending cash balance of $83,600. Operating activities provided $377,200; investing activities used $436,100; and financing activities used $349,300. What was the beginning cash balance? a. $324,600 b. $491,800 c. $547,600 d. $581,800 e. None of the above. 3. Jones Manufacturing Company reported assets of $1,391,500 and liabilities of $598,800 on its balance sheet at December 31, 2004. For the year ended December 31, 2005, Jones had revenues of $632,400 and expenses of $594,300. Jones issued $54,700 of common stock during 2005 and paid dividends of $31,100. At December 31, 2005, liabilities were $614,700. What were assets at December 31, 2005? a. $1,469,100 b. $1,437,300 c. $1,392,900 d. $1,345,700 e. None of the above. 4. During the last week of 2005, a company provided $1,079,400 of services on account, received $785,800 in advance for services to be provided in 2006, and incurred $596,000 of expenses to be paid in 2006. What effect did these transactions have on the company?s total assets and its book value? a. Assets increased $1,865,200, and book value increased $1,079,400. b. Assets increased $1,865,200, and book value increased $483,400. c. Assets increased $1,269,200, and book value increased $483,400. d. Assets increased $1,269,200, and book value increased $1,079,400. e. None of the above. 5. A firm paid $34,800 on November 1, 2004, representing two years? rent on a storage building. On August 1, 2005, the firm paid $19,200 for two years? rent on a lease for office furniture. The leases went into effect on the dates that the rents were paid. What amount of Prepaid Rent should the firm report on its balance sheet at December 31, 2005, related to these two leases? a. $27,450 b. $28,100 c. $29,700 d. $31,950 e. None of the above. 6. Retained Earnings had a beginning balance of $1,628,900 and an ending balance of $2,452,300. Total revenues for the year were $6,707,500. During the year, $288,000 of common stock was issued for cash, and $518,100 in dividends were paid. Which of the following is true? a. Total expenses for the year were $5,884,100. b. Net income for the year was $1,341,500. c. Total expenses for the year were $6,172,100. d. Net income for the year was $823,400. e. More than one of the above answers is correct. 7. On December 30, 2005, a company received $43,500 in cash in advance for services to be performed. The company recorded the amount as Service Revenue, but the services were not performed until January 2006. No adjusting entry was made at December 31, 2005. What are the effects of this error on the December 31, 2005 financial statements? a. Liabilities are understated, and there is no effect on cash flow from operating activities. b. Shareholders? equity is overstated, and cash from operating activities is overstated. c. Liabilities are overstated, and there is no effect on cash flow from operating activities. d. Shareholders? equity is understated, and cash from operating activities is understated. e. There is no effect on net assets, and there is no effect on cash flow from operating activities. 8. A firm had only the following transactions during the month of January 2006: - received $1,000,000 in advance from a client for services that will be provided over the next several months; one-fourth of the services were provided in January. - received $159,000 from other clients: $126,000 of this was for collections on account; $30,000 for services to be provided in February, and the rest for services provided in January for cash. - paid $287,000 in cash expenses for January - recorded $322,200 of unpaid expenses for January - billed clients $394,400 for services performed in January Based on these transactions, how much accrual-basis net income did the firm earn during January 2006? a. $38,200 b. $68,200 c. $612,200 d. $1,388,200 e. None of the above. 9. Wages Expense for 2004 was $3,537,400, and it was $3,242,300 for 2005. The balance in Wages Payable was $628,900 at December 31, 2004, and at December 31, 2005, the balance was $922,500. How much cash was paid for wages in 2005? a. $2,948,700 b. $3,243,800 c. $3,535,900 d. $3,831,000 e. None of the above. 10. All of the customers of Northern Sled Company pay in advance, and Northern records all amounts received as Unearned Revenue. In the December 31, 2004 balance sheet, Northern reported Unearned Revenue of $31,600. At December 31, 2005, after all adjustments to the accounts had been made, the balance in Unearned Revenue was $36,800. Revenue for 2005 was $654,400. Which of the following describes the net effects of these changes in the accounts? Cash increased $649,200, and liabilities increased $5,200. Cash increased $649,200, and liabilities increased $36,800. Cash increased $659,600, and liabilities increased $36,800. Cash increased $659,600, and liabilities increased $5,200. None of the above. Problem II: Transactions Analysis (25 Points) Part A. The following transactions summarize the activities for Smith Company for January 2006, its first month of existence: On January 2, the company issued common stock for $50,000 in cash and also borrowed $10,000 from a bank on a 30-day note. Inventory of $1,000 was purchased on credit. The inventory purchased in part b. was sold on credit for $2,000. The company paid $9,000 in cash to acquire equipment. The company repaid the note payable when in came due on January 31, 2006, along with $100 of interest that had accrued on the note. The company collected the $2,000 due from customers for the sales in part c. The company recorded $250 depreciation on the equipment at January 31. The company accrued $800 of employee wages at January 31, to be paid on February 5. Requirements: Record the entries for the transactions, either in terms of the balance sheet equation, in the format of the template used in Module 2 of the textbook, or in general journal entry form. Please record the transactions and adjustments next to the letters beginning below. Entries for the Transactions: _________________________________________________________________________________ a. _________________________________________________________________________________ b. _________________________________________________________________________________ c. _________________________________________________________________________________ d. _________________________________________________________________________________ e. _________________________________________________________________________________ f. _________________________________________________________________________________ g. _________________________________________________________________________________ h. _________________________________________________________________________________ Based strictly on the transactions described above, compute total shareholders? equity for the firm at January 31, 2006. Problem III: Account Analysis (45 Points) Part A. An examination of the financial statements of Marvel Enterprises, Inc. and the footnotes indicates that the company has the following assets and liabilities at December 31, 2004 and December 31, 2003: 2004 2003 Prepaid expenses (Asset) 2,273 2,734 Accrued compensation expense (Liability) 4,074 5,545 Accrued advertising cost (Liability) 608 2,444 If Marvel had always (in 2004 and in past years) recognized expenses related to these items on the cash basis instead of using the accrual basis, how would the following categories be affected on the December 31, 2004 financial statements? (Give direction and amount of change, e.g., ?Revenues would be higher by $1,000?.) 1. Revenue for the year ended December 31, 2004. 2. Expenses reported for the year ended December 31, 2004. 3. Total Assets on December 31, 2004. 4. Total Shareholders? Equity on December 31, 2004. Part B. Refer to the balance sheets on pages 11 and 12 extracted from Marvel Enterprises, Inc.?s financial statements to answer these questions. Note: 1. All amounts in the extracts to the financial statements and in these questions are in thousands of dollars. According to the income statements, Marvel has revenue from three sources: It has direct mail order customers, to whom it sells one-year subscriptions and collects cash in advance. Upon collection, these unearned revenues are recorded as a liability, ?Deferred subscription revenue? and are recognized as revenue over the year as the comics are mailed to the customers. It has retail outlet customers, to whom all sales are made on account, with cash payment due within 30 days of delivery. Revenue on sales to retail outlets is recognized as soon as the retailer takes delivery. It makes cash sales to customers. Gross sales revenue recognized in 2004 is $513,468, and cost of goods sold recognized in 2004 is $159,859 (in thousands). Thirty percent (30%) of this revenue is due to recognizing ?deferred subscription revenue?, 10 percent is due to cash sales, and the remaining 60 percent is due to credit sales to retail outlets. Requirements: How much cash was collected in 2004 from direct mail order customers? Calculate the total cash received from retail outlets in 2004. Assume that ?Inventories? represents paper, ink, etc., purchased on account from outside suppliers. Calculate the total purchases of such inventory in 2004. Assume that ?Accounts payable? on the balance sheets relate strictly to such inventory purchases. Compute the amount of cash paid for inventory in 2004. MARVEL ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS December 31, December 31, 2003 2004 --------------------------- (Dollars in thousands) ASSETS Current assets: Cash and cash equivalents................... $ 32,562 $204,790 Certificates of deposit and commercial paper.................................... 214,457 - Accounts receivable........................ 51,820 73,576 Inventories................................. 12,975 6,587 Distribution receivable from joint venture.. 2,056 - Deferred interest costs..................... 18,197 7,981 Deferred financing costs.................... 667 - Prepaid expenses and other current assets... 2,273 2,734 --------------------------- Total current assets.................. 335,007 295,668 Molds, tools and equipment, net............... 5,811 5,553 Product and package design costs, net ........ 1,433 1,249 Goodwill, net ................................ 341,708 341,708 Notes receivable, non-current..... ........... 26,437 37,718 Deferred income taxes, net.................... 28,246 32,583 Deferred financing costs, non-current......... 2,779 - Other assets.................................. 436 335 --------------------------- Total assets.......................... $ 741,857 $714,814 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 18,455 $ 6,006 Accrued royalties........................... 32,936 57,879 Accrued expenses and other current liabilities 31,442 43,962 Minority interest to be distributed......... - 8,428 Unsecured creditors payable ................ 2,963 - Income taxes payable........................ 4,705 10,129 Deferred subscription revenue ............... 30,308 27,033 --------------------------- Total current liabilities............. 120,809 153,437 Senior notes.................................. 150,962 - Accrued rent.................................. 636 165 Deferred interest, non-current portion......... - 14,712 --------------------------- Total liabilities..................... 272,407 168,314 --------------------------- Stockholders' equity: Common stock, $.01 par value, 250,000,000 shares authorized, 119,706,206 issued and 108,615,206 outstanding in 2003 and 120,442,988 issued and 105,101,788 outstanding in 2004....................................... 1,198 1,205 Deferred stock compensation.................. (4,857) (5,164) Additional paid-in capital................... 566,908 577,169 Retained earnings (deficit .................. (57,934) 66,943 Accumulated other comprehensive loss......... (2,910) (2,652) --------------------------- Total stockholders' equity before treasury stock...................... 502,405 637,501 Treasury stock, 11,091,000 shares in 2003 and 15,341,200 shares in 2004........... (32,955) (91,001) --------------------------- Total stockholders' equity .......... 469,450 546,500 --------------------------- Total liabilities and stockholders' equity $ 741,857 $714,814 =========================== PAGE PAGE 3