1. ACCT 504 FINAL EXAM
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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?

2. (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

3. 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

4. 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.

5. Average common shares outstanding 35,000 Current liabilities $25,000
Capital expenditures $20,000 Net income $50,000
Cash provided by operations $77,000 Net sales $100,000
Preferred stock dividends paid $30,000 Total liabilities $50,000
Current assets $20,000 Total assets $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 Figure Indication
Current Ratio (Current Assets)/(Current Liabilities) 0.8x This means that the firm
will have a hard time paying off its current liabilities if the need arises.
Working Capital Current Assets-Current Liabilities -$5,000 This means that the
firm cannot continue its operations without facing many obligations.
Earnings per share (Net Income-Preferred Dividends)/(Number of Common
Shares) $0.57 a share This means that investors are earning $0.57 per share
owned.
Debt to total assets ratio ((Total Debt))/(Total Assets) 0.625 This means the
company’s capital structure relies so much on debt
FCF Cash by operations-Capital Exp. $57,000 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

6. 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)
Nov Dec
Beginning Cash Balance $32,000 $40,000
Cash Receipts:
Cash sales $204,000 $156,000
Collection of Sales $105,600 $81,600
Sale of Plant $49,400 $0
Sale of Stocks $0 $67,400

7. Cash Disbursements:
Payment of Purchases ($212,000) ($122,400)
Operating Expenses ($27,000) ($27,000)
S&A Expenses ($50,000) ($50,000)
Dividends ($76,000) $0
Equipment Purchase $0 ($24,000)
Interest Payments $0 ($1,680)
Borrowing $14,000 $0
Ending Balance $40,000 $119,920
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

8. 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 $115,000
Cost of Goods Sold ($53,000)
Gross Margin $62,000
Salaries Expense ($42,000)
Depreciation Expense ($6,300)
Interest Expense ($4,300)
Net Income $9,400
Lansing Company
Statement of Retained Earnings
Beginning Retained Earnings $80,000
Add: Net Income $9,400
Less: Dividends Paid ($5,300)
Ending Retained Earnings $89,400
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.

9. 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 Principle Type
Everyone has access to the petty cash fund Proper authorization Weakness
Cash register codes are assigned to each cashier. Segregation of duties
Strength
The treasurer is the only one allowed to sign checks. Proper Authorization
Strength
Supervisors count cash receipts daily. Independent checks Strength
The treasurer approves of the purchases and makes the payment because he is
familiar with the purchases. 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)

10. Cash DR $150 ,000
Common Stock CR $150,000
Accounts Payable DR $10,000
Cash CR $10,000
Cash DR $15,000
Unearned Revenue CR $15,000
Equipment DR $7,500
Cash CR $7,500
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) Paymentofdividends
e) Increase in inventory (Points : 30)
Event Section Result
Depreciation of equipment Operating Inflow
Increase in accounts payable Operating Inflow
Sold a building at book value Investing Inflow
Payment of dividends Financing Outflow
Increase in inventory Operating Outflow