NOTE: I WILL SUPPLY YOU WITH A LIST OF RATIOS AND FORMULAS IF NEEDED ROSS SCHOOL OF BUSINESS UNIVERSITY OF MICHIGAN ACCOUNTING 501 PRINCIPLES OF FINANCIAL ACCOUNTING WINTER 2006 PRACTICE FINAL EXAM Please print your name above. The exam is closed-book. You may use a calculator. You will have 120 minutes to complete the exam. 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 Problem III. to receive full credit. Point Distribution Problem Points Possible Points Earned I. Multiple Choice 45 _____ II. Effect of Errors 16 _____ III. Analysis of Cash Flows and Accruals 39 _____ 100 ______ At the conclusion of the 120-minute exam 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 exam. I certify that I have neither given nor received prohibited aid on this exam. Signed _______________________________________________ Problem I. Multiple Choice (45 points total; 3 points each) Circle the best answer for each question. NOTES: ( 1. Unless otherwise indicated, each question is independent of the others. 2. For each question, use December 31 as the fiscal year-end. 1. At the beginning of the year, a firm had beginning balances in the Supplies account of $13,500. During the year, the firm made three supplies purchases of $5,000 each. The first two payments were expensed immediately, and the last purchase was entered into the Supplies account. A physical count at year-end revealed $20,500 of supplies on hand. Which of the following resulted from the adjustment to properly state the accounts at year-end? a. Prepaid Supplies increased $8,000 and Supplies decreased $8,000 b. Supplies Expense increased $2,000 and Supplies decreased $2,000 c. Supplies increased $8,000 and Supplies Expense decreased $8,000 d. Supplies increased $2,000 and Supplies Expense decreased $2,000 e. None of the above. 2. A firm had beginning balances in Accounts Receivable of $300,000 and in the Allowance for Bad Debts of $25,800. The ending balance in Accounts Receivable was $387,000. During the year, the firm recorded $186,000 in credit sales and wrote off $9,900 of uncollectible accounts. What was the amount of cash collected from customers on account? a. $ 89,100 b. $186,000 c. $191,100 d. $249,000 e. None of the above. 3. A firm uses the LIFO method for computing inventory and cost of goods sold. The December 31, 2000 financial statements report net income of $1,926,000, ending inventory of $1,893,600, and cost of goods sold of $4,818,000. A note to the financial statements reports: ?The LIFO Reserve for 1999 was $70,800, and for 2000 it was $206,400.? What would net income have been under the FIFO method, assuming an income tax rate of 35%? a. $1,837,860 b. $2,304,300 c. $2,061,600 d. $2,014,140 e. None of the above. 4. A firm uses the double-declining balance method to depreciate its machinery and equipment. The firm has a machine with an original purchase price of $360,000 and a salvage value of $40,000. The firm reported $157,500 of accumulated depreciation on this machine at December 31, 2004. For the year ended December 31, 2005, the firm reported $50,625 of depreciation expense on the machine. What is the estimated useful life of this machine? a. 2 years b. 4 years c. 6 years d. 8 years e. None of the above. 5. On January 1, 2003, Dunston, Inc. issued $2,000,000 of 12% bonds that mature January 1, 2011. The bonds were sold to yield 10%, and Dunston received a total of $2,216,560 in proceeds. Interest is payable on June 30 and December 31 each year. Dunston uses the effective interest method to amortize bond discounts and premiums. What amount of interest expense will Dunston report on its income statement for the year ended December 31, 2003? a. $221,197 b. $222,115 c. $264,062 d. $121,068 e. $240,000 6. A 6-year lease was signed on January 1 of the current year for an asset that has an expected useful life of 6 years. The lease requires $50,000 annual payments, with the first payment due immediately. The interest rate on the lease is 14%, and the present value of the future lease payments at 14% is $171,650. Straight-line depreciation with a zero salvage value is used for all capital leases. How will total expense related to this lease and the asset differ if the lease is accounted for as an operating lease rather than as a capital lease? a. Lower in the first year and lower over the 6 years. b. Lower in the first year and no difference in total over the 6 years. c. Higher in the first year and lower over the 6 years. d. Higher in the first year and no difference in total over the 6 years. e. No difference in the first year and no difference in total over the 6 years. 7. A firm was holding 4,000 shares of its $3 par value common stock in the treasury. The stock had been purchased three years ago for $22 per share. Yesterday, the firm sold 1,500 shares of the treasury stock for $30 per share. Which of the following resulted from this sale of treasury stock? a. Retained Earnings decreased by $45,000. b. Treasury Stock decreased by $33,000. c. Additional Paid-in Capital from Treasury Stock Transactions decreased by $12,000. d. There was a Gain on Sale of Treasury Stock of $12,000. e. None of the above. 8. A firm is trying to decide whether to declare a small stock dividend, a large stock dividend, or a cash dividend. The par value of the common stock is $1 and the current market price is $30 per share. How would Additional Paid-in Capital be affected by each of these dividends? Small Large Cash Stock Dividend Stock Dividend Dividend a. no effect increase no effect b. increase increase no effect c. no effect no effect no effect d. increase no effect no effect e. no effect increase increase 9. On January 1, 110,000 shares of $12 par value common stock were issued and 100,000 shares were outstanding. On April 20, with the market price of the stock at $27 per share, the firm declared and distributed a 28% stock dividend. What was the result of this stock dividend? a. $336,000 was transferred from Retained Earnings to the Common Stock account. b. 100,000 new shares of stock were issued. c. $420,000 was transferred from the Paid in Excess account to Retained Earnings. d. 30,800 new shares of stock were issued. e. $756,000 was transferred from Retained Earnings to the Common Stock account. 10. On January 1, 2005, the accounting records of Saber, Inc. showed $100,000 in Common Stock, $100,000 in Additional Paid-in Capital, and $45,000 in Retained Earnings. Saber purchased 2,000 shares of its own stock from the market for $15 per share on January 21 to hold in the treasury. On March 15, the firm sold 1,000 of these shares for $20 per share. On June 10, the firm sold 500 of the remaining shares at $10 per share. There were no other stock transactions. What was total stockholders? equity at June 10 after these transactions? $242,500 $240,000 $245,000 $237,500 None of the above. 11. Which of the following would not be found in the operating activities section of the statement of cash flows when using the direct method? Cash paid for purchases of land Cash paid to suppliers of inventory Cash paid for income taxes Cash received from customers Cash paid for interest 12. The following information is available from ZAX Corporation?s accounting records for the year ended December 31, 2001: Cash received from customers $550,000 Rents received 65,000 Cash paid for purchase of supplies 325,000 Cash dividends paid to shareholders 25,000 Income taxes paid 45,000 Based upon this information, net cash flow from operating activities for 2001 totaled $180,000. $220,000. $245,000. $290,000. None of the above. 13. Which of the following is not considered a financing activity? Repayment of bonds. Issuance of common stock. Payment of dividends. Payment of interest. All of the above are financing activities. 14. The Weston Company had the following account balances on its balance sheets at December 31, 2001 and 2000, respectively: 12/31/01 12/31/00 Property and Equipment $ 79,000 $ 67,000 Accumulated Depreciation 44,000 39,000 Depreciation expense for 2001 was $7,000. There were no gains or losses from the sale of property or equipment on the 2001 income statement. However, one piece of equipment with an original cost of $8,000 was sold during 2001. What was the positive cash flow associated with the sale of the equipment by Weston Company in 2001? a. $2,000 b. $4,000 c. $6,000 d. $8,000 e. Unable to tell from the information given. 15. A company incurred a loss during the current year. This loss was shown on the income statement as a component of income from continuing operations. Which of the following describes why it was shown this way? a. It was related to the sale of assets of discontinued operations. b. It resulted from a change in accounting principle. c. It was highly unusual and not expected to recur. d. It was related to the operating activities of discontinued operations. e. It was related to the sale of obsolete inventory. Problem II. Effect of Errors (16 points total; 1 point each) A firm made several errors during the fiscal years ended December 31, 2002 and 2003 that affected the financial statements. Assume that each error is independent of the others; assume also that, unless otherwise indicated, the error has not been discovered or corrected. Indicate the effect of each error on the financial statement elements specified. You may use the following to indicate your answers: O = The amount of this element would be above the correct amount (overstated) U = The amount of this element would be below the correct amount (understated) NE = The amount of this element is correct (no effect on the amount of this element) Notes: 1. It is not necessary to show the dollar effect of the errors. 2. In each case, ignore the effect of income taxes. 1. On December 15, 2002, the firm received $10,000 in advance from a customer for goods to be delivered. The firm recorded the transaction as an increase in Cash and an increase in Revenue. One-half of the goods were delivered on December 20, 2002, and the other half was delivered on January 20, 2003. No other entries were made. Effect on: Net income for 2002 ________ Total Liabilities at 12/31/02 ________ Net income for 2003 ________ Cash Flows from Operating Activities for 2003 ________ 2. On December 22, 2002, $1,200 of merchandise was sold to a customer on account and the proper entry was made to record this transaction. On January 22, 2003, the customer paid the account and the entry to record this transaction was an increase in Cash and an increase in Accounts Payable of $1,200. Effect on: Total Assets at 12/31/02 ________ Total Assets at 12/31/03 ________ Total Stockholders? Equity at 12/31/03 ________ Cash Flows from Operating Activities for 2003 ________ 3. The firm uses a periodic inventory system to record inventory transactions and the FIFO method to determine inventory costs. On December 1, 2002, the firm purchased $3,000 of inventory on credit but failed to record the purchase. The goods were not included in the December 31, 2002 inventory count. On January 1, 2003, the firm paid for the goods, reducing Accounts Payable and reducing Cash for the full amount. No other entries were made. Effect on: Net Income for 2002 ________ Net Income for 2003 ________ Total Liabilities at 12/31/03 ________ Total Stockholders? Equity at 12/31/03 ________ 4. On October 1, 2002, the firm purchased equipment with a 5-year life and zero salvage value. The firm paid $7,000, which included $1,000 of installation charges. The entry to record this transaction was an increase in Equipment of $6,000, an increase in Repairs and Maintenance Expense of $1,000, and a decrease in Cash of $7,000. Effect on: Net Income for 2002 ________ Net Income for 2003 ________ Total Stockholders? Equity at 12/31/03 ________ Cash Flows from Operating Activities for 2003 ________ PROBLEM III: Analysis of Cash Flows and Accruals (39 Points) The following comparative balance sheet data (in millions) were available for Brand X Corporation at December 31: Brand X Corporation Comparative Balance Sheets December 31 2004 2003 Cash $ 78 $ 53 Accounts Receivable 1,128 692 Less: Allowance for Doubtful Accounts (39) (26) Inventory 1,693 1,264 Prepaid Insurance 209 105 Plant and Equipment 1,840 1,385 Less: Accumulated Depreciation (775) (640) Total Assets $ 4,134 $ 2,833 Accounts Payable (all pertaining to inventory) $ 316 $ 256 Income Taxes Payable 923 607 Bonds Payable 1,631 671 Common Stock 400 400 Retained Earnings 864 899 Total liabilities and stockholder?s equity $ 4,134 $ 2,833 The following additional data are assumed to be from either the 2004 income statement or the cash flow statement: Net income for 2004 $ 453 Cash received for plant and equipment sold during 2004 17 Loss on sale of plant and equipment sold during 2004 20 Depreciation expense for 2004 141 Income taxes paid in cash during 2004 349 Bad debt expense for 2004 118 Cash paid for inventory during 2004 10,870 Additional cash borrowed long-term during 2004 1,482 Insurance expense for 2004 950 Credit sales for 2004 13,110 Additional assumption: All inventory is purchased on account. Using the above information, compute the amounts requested below. You must show calculations to receive any credit. NOTE: ON THE ACTUAL EXAM, I WILL PROVIDE YOU WITH PLENTY OF SPACE FOR YOU TO SHOW YOUR WORK. 1. What was cost of goods sold for 2004? (6 points) ________________ Calculation: 2. What were write-offs of uncollectible accounts for 2004? (4 points) Calculation: ________________ 3. How much cash was collected on accounts receivable during 2004? (4 points) ________________ Calculation: 4. How much cash was paid for insurance during 2004? (4 points) ________________ Calculation: 5. What was the cost of plant and equipment sold during 2004? (8 points) ________________ Calculation: 6. What was the cost of plant and equipment purchased in 2004? (5 points) ________________ Calculation: 7. What was 2004 income tax expense? (4 points) ________________ Calculation: 8. What were dividends for 2004? (4 points) ________________ Calculation: SF- PAGE 5
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