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Principle of Accountancy
 

Principle of Accountancy

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    Principle of Accountancy Principle of Accountancy Document Transcript

    • Accounting PrinciplesQuestion 1:Under generally acceptable accounting principles, it is possible for twocompanies with identical operating results may not report identical netincomes.Answer: falseQuestion 2:Ratios are used to compare different firms in the same industry.True- used to compares firm in an industry and also changes overtimeAnswer: True:Question 3:Profitability ratios are distorted by inflation because profits are statedin current dollars and assets and equity are stated in historical dollars.Answer: True:Question 4:A firm with heavy long-term debt can benefit during inflationarytimes, as debt can be repaid with "cheaper" dollars.True- example if a firm borrows 10 million today, this amount isrelatively high today, if there is inflation this means prices go up, ifthere is inflation then this means that this amount will be look smallwhen the firm repaysAnswer: True:Question 5:Debt utilization ratios are used to evaluate the firms debt position withregard to its asset base and earning power.False- debt utilisation show level of assets financed through debtAnswer: falseQuestion 6:
    • The statement of cash flows helps measure how the changes in abalance sheet were financed between two time periods.Answer: True:Question 7:Net working capital is the difference between current assets andcurrent liabilities.Working capital = CA - CLAnswer: True:Question 8:Depreciation is an accounting entry and does not involve a cashexpense.Answer: True:Question 9:Total assets of a firm are financed with liabilities and stockholdersequity.True- finance using debt or equityAnswer: True:Question 10:Sales minus operating costs = operating income.Answer: True:Question 11:Shop-Til-You-Drop Inc. recently reported net income of $5.2 millionand depreciation of $600,000. What is was net cash flow? (Assume ithas no amortization expense.)Net cash flow = net income + depreciation + amortisationNet cash flow = 5.2m+0.6m=5.8 millionAnswer: 5.8 millionQuestion 12:Temple Square Inc. reported that its retained earnings for 2005 were$490,000. In its 2006 financial statements, it reported $60,000 of net
    • income, and it ended 2006 with $510,000 of retained earnings. Howmuch were paid as dividends to shareholders during 2006?2005 retained earnings = 490,0002006 net income = 60,0002006 retained earnings = 510,000 Earnings available for pay out in 2006 = 490,000 + 60,000 = 550,000If dividends were not paid reined earnings would be 550,000Dividends = 550,000 – 510,000 = 40,000Answer 40,000Question 13:Fine Breads Inc. paid out $26,000 common dividends during 2005,and it ended the year with $150,000 of retained earnings. The prioryear’s retained earnings were $145,500. What was the firms 2005 netincome?2004 retained earnings = 145,000Dividends 2005=26,0002005 retained earnings = 150,000Change in retained earnings = 150,000 – 145,000 = 5,000Net income 2005 = change in retained earnings + dividendsNet income = 5,000 + 26,000 = 31,000Answer 31,000Question 14:Which of the following items is NOT included in current assets?A. Accounts payableB. InventoryC. Accounts receivableD. CashE. Short-term, highly liquid, marketable securitiesAnswer: Accounts payableQuestion 15:
    • Other things held constant, which of the following actions wouldincrease the amount of cash on a company’s balance sheet?A. The company issues new common stock.B. The company repurchases common stockC. The company pays a dividend.D. The company purchases a new piece of equipmentE. The company gives customers more time to pay their billsAnswer: The Company issues new common stock.Question 16:Miller Metals recently reported $9,000 of sales, $6,000 of operatingcosts other than depreciation, and $1,500 of depreciation. Thecompany had no amortization charges, it had $4,000 of bonds thatcarry a 7% interest rate, and its federal-plus-state income tax rate was40%. What was its net cash flow?Net cash flow = net income + amortisation + depreciationNet income = sales – operating costs – depreciation – interest – taxNet income =9000 – 6000 – 500 – (4,000*7%) – taxNet income =2500 – 280 – taxNet income =2220– taxTax = 2220*40%=888Net income =2220– 888=1332Net cash flow = net income + amortisation + depreciationNet cash flow = 1332+280+500=2112Answer: 2112Question 17:Which of the following statements is CORRECT?1. The statement of cash flows shows where the firm’s cash is located,with a listing of all banks and brokerage houses where cash is ondeposit.2. The statement of cash flows for 2005 shows how much the firm’scash (the total of currency, bank deposits, and short-term liquidsecurities, or cash equivalents) increased or decreased during 2005.
    • 3. The statement of cash flows reflects cash flows from operations andfrom borrowings, but it does not reflect cash obtained by selling newcommon stock.4. The statement of cash flows reflects cash flows from operations, butit does not reflect the effects of buying or selling fixed assets.5. The statement of cash flows reflects cash flows from continuingoperations, but it does not reflect the effects of changes in workingcapital.Answer: The statement of cash flows for 2005 shows how much thefirm’s cash (the total of currency, bank deposits, and short-termliquid securities, or cash equivalents) increased or decreased during2005.Question 18:Which of the following statements is CORRECT?1. In the statement of cash flows, depreciation charges are reported asa use of cash.2. In the statement of cash flows, a decrease in accounts receivable isreported as a use of cash.3. In the statement of cash flows, a decrease in inventories is reportedas a use of cash.4. In the statement of cash flows, a decrease in accounts payable isreported as a use of cash.5. Dividends do not show up in the statement of cash flows becausedividends are considered to be a financing activity, not an operatingactivity.Answer: In the statement of cash flows, a decrease in accountspayable is reported as a use of cash.Question 19:Which of the following statements is CORRECT?1. Depreciation reduces a firm’s cash balance, so an increase indepreciation would normally lead to a reduction in the firm’s net cashflow.2. Net cash flow (NCF) is defined as follows:
    • Net Cash Flow = Net Income + Depreciation and AmortizationCharges.3. Depreciation and amortization are not cash charges, so neither ofthem has an effect on a firm’s reported profits.4. The more depreciation a firm reports, the higher its tax bill, otherthings held constant.5. People sometimes talk about the firm’s net cash flow, which isshown as the bottom entry on the income statement, as the “bottomline.”Answer: Net cash flow (NCF) is defined as follows:Net Cash Flow = Net Income + Depreciation and AmortizationCharges.Question 20:Last year Aldrin Company’s operations provided a negative net cashflow, yet the cash shown on its balance sheet increased. Which of thefollowing statement could explain the increase in cash, assuming thecompany’s financial statements were prepared under generallyaccepted accounting principles?1. The company retired a large amount of its long-term debt.2. The company repurchased some of its common stock.3. The company sold some of its fixed assets.4. The company had high depreciation expenses.5. The company dramatically increased its capital expenditures.Answer: The Company repurchased some of its common stock.Question 21:Analysts who follow Sierra Nevada Inc. recently noted that, relative tothe previous year, the company’s operating net cash flow increased,yet cash as reported on the balance sheet declined. Which of thefollowing factors could explain this situation?1. The company sold a division and received cash in return.2. The company cut its dividend.3. The company made a large investment in a new plant.4. The company issued new long-term debt.
    • 5. The company issued new common stock.Answer: The Company issued new common stock.Question 22:Last year, Owen Technologies reported (1) a negative net cash flowfrom operations, (2) a negative free cash flow, and (3) an increase incash as reported on its balance sheet. Which of the following factorscould explain this situation?1. The company had a sharp increase in its depreciation andamortization expenses.2. The company had a sharp increase in its inventories.3. The company sold a new issue of common stock.4. The company had a sharp increase in its accrued liabilities.5. The company made a large capital investment early in the year.Large investment- reduces free cash flow and net cash flow,investment may have been financed by debt therefore no change incashAnswer: The Company made a large capital investment early in theyearQuestion 23:On its 2004 balance sheet, Sherman Books showed $510 million ofretained earnings, and exactly the same amount was shown thefollowing year. Assuming that no earnings restatements were issued,which of the following statements is CORRECT?1. The company definitely had zero net income in 2005.2. The company must have paid no dividends in 2005.3. Dividends could have been paid in 2005, but they would have had toequal the earnings for the year.4. If the company lost money in 2005, they must have paid dividends.5. The company must have paid out half of its earnings as dividends.Answer: statement 3: Dividends could have been paid in 2005, butthey would have had to equal the earnings for the year.Question 24:
    • Which of the following statements is CORRECT?1. Accounts receivable are reported as a current liability on thebalance sheet.2. Dividends paid reduce the net income that is reported on acompany’s income statement.3. If a company uses some of its bank deposits to buy short-term,highly liquid marketable securities, this will cause a decline in itscurrent assets as shown on the balance sheet.4. If a company issues new long-term bonds during the current year,this will increase its reported current liabilities at the end of the year.5. If a company pays more in dividends than it generates in netincome, its retained earnings as reported on the balance sheet will fall.Answer: Statement 5: If a company pays more in dividends than itgenerates in net income, its retained earnings as reported on thebalance sheet will fall.Question 25:Cox Corporation reported EBITDA of $22.5 million and $5.4 millionof net income. The company has a $6 million interest expense and itscorporate tax rate is 35%. What was Cox’s depreciation andamortization expense?EBITDA= $22.5 millionNet income =5.4 millionInterest expense=6 millionCorporate tax rate= 35%Depreciation + amortization=YNet income = EBITDA – tax – depreciation – amortisation- interest -taxCalculations:Tax expenses = 35% X (EBITDA – interest expenses- Y(depreciation and amortisation)Tax expenses = 35% X (22.5m – 6m- Y)Net income = EBITDA – tax – depreciation – amortisation- interest -tax
    • 5.4 = 22.5 – [35% X (22.5 – 6- Y)] – Y- 65.4 = 16.5 – [35% X (16.5- Y)] – Y5.4 = 16.5 – [5.775- 0.35Y] – Y5.4 = 16.5 – 5.775+ 0.35Y – Y5.4 = 10.725 + 0.35Y – Y0.65Y= 5.325Depreciation and amortization expense =Y= 8.19millionAnswer = 8.19 millionQuestion 26:Byrd Lumber has 2 million shares of common stock outstanding thatsell for $15 a share. If the company has $40 million of common equity,what is the company’s Market Value Added (MVA)?Market value added = value of the firm in the market – capitalinvested in the firmMarket value added = (2 million X 15) – 40 millionMarket value added = -30,000Answer: Market value added = -30,000Question 27:Hybrid Battery Systems recently reported $9,000 of sales, $6,000 ofoperating costs other than depreciation, and $500 of depreciation. Thecompany had no amortization charges, it had $4,000 of bonds thatcarry a 7% interest rate, and its federal-plus-state income tax rate was40%. In order to sustain its operations and thus generate sales andcash flows in the future, the firm was required to make $800 of capitalexpenditures on new fixed assets and to invest $500 in net operatingworking capital. By how much did the firms net income exceed its freecash flow?Net income = sales – operating costs – depreciation – interest – taxNet income =9000 – 6000 – 500 – (4,000*7%) – taxNet income =2500 – 280 – taxNet income =2220– taxTax = 2220*40%=888
    • Net income =2220– 888=1332Free cash flow = net income + amortisation + depreciation-change inworking capitalFree cash flow = 1332+280+500=2112Difference between free cash flow and net income=2112-1332=780Answer =-780Question 28:Ramala Corps sales last year were $48,000, and its total assets were$25,500. What was its total assets turnover ratio (TATO)?Asset turnover ratio = sales/ assetsAsset turnover ratio =48000/25500Asset turnover ratio =1.8824Answer: 1.8824Question 29:Roberts Corps sales last year were $300,000, and its net income aftertaxes was $25,000. What was its profit margin on sales?Profit margin = income after tax/ salesProfit margin = 25000/300000Profit margin=0.0833 = 8.33%Answer: 8.33%Question 30:Reynolds Corps total assets at the end of last year were $300,000 andits net income after taxes was $25,000. What was its return on totalassets?Returns on total assets = income after tax/ assetsReturns on total assets =25,000/300,000, Returns on total assets=0.0833 = 8.33%Answer: 8.33%Question 31:
    • Rutland Corps stock price at the end of last year was $30.25 and itsearnings per share for the year were $2.45. What was its P/E ratio?P/E ratio = price per share / earnings per shareP/E ratio = 30.25/2.45P/E ratio = 12.347Answer: 12.347Question 32:Rand Corps stock price at the end of last year was $40.00, and itsbook value per share was $24.50. What was its Market/Book ratio?Market/Book ratio= market value/ book valueMarket/Book ratio= 40/ 24.5Market/Book ratio= 1.6327Answer: 1.6327Question 33:Rolle Corp has $500,000 of assets, and it uses no debt--it is financedonly with common equity. The new CFO wants to employ enough debtto bring the Debt/Assets ratio to 45%, using the proceeds from theborrowing to buy back common stock at its book value. How muchmust the firm borrow to achieve the target debt ratio?Debt ratio = debt/total assetsRequired debt ratio = 0.45 or 60%Debt ratio = 0.45 = [x / 500,000]Where x is amount of debtsSolution for x:0.6 = [x / 500,000]300,000 = xX = 300,000Answer: borrowing should be 300,000Question 34:Rull Corps assets are $500,000, and its total debt outstanding is$200,000. The new CFO wants to employ a debt ratio of 60%. How
    • much debt must the company add or subtract to achieve the target debtratio?Debt ratio = debt/total assetsRull debt ratio = 200,000/500,000 = 0.4 or 40%Required debt ratio = 0.6 or 60%In order to increase debt ratio debts should be increased:Debt ratio = 0.6 = [200,000 + x / 500,000]Where x is amount of debts to increaseSolution for x:0.6 = [200,000 + x / 500,000]300,000 = 200,000 + xX = 100,000Answer: increase debt by 100,000Question 35:Rangoon Corps sales last year were $400,000, and its year-end totalassets were $300,000. The average firm in the industry has a totalassets turnover ratio (TATO) of 2.5. The new CFO believes the firmhas excess assets that can be sold so as to bring the TATO down to theindustry average without affecting sales. By how much must the assetsbe reduced to bring the TATO to the industry average?Industry asset turnover =2.5Asset turnover = sales/ total assetsRangoon asset turnover = 400,000/300,000 = 1.333333To achieve industry average then:Rangoon asset turnover = [400,000/ (300,000 – x)] = 2.5Where x is the amount of assets to be soldSolution for x:[400,000/ (300,000 – x)] = 2.5400,000 = 750,000 – 2.5 x2.5x = 350,000X = 140,000
    • Answer: assets should be reduced by 140,000Question 36:Considered alone, which of the following would increase acompany’s current ratio?Current ratio = current assets/ current liabilities,Current ratio will increase if current assets increase or currentliabilities decreaseAnswer: Increase in current assets or decline in current liabilitiesOnline Assignment – Your Homework Help Partner Mail: homework@onlineassignment.net Website: www.onlineassignment.net Live Chat: Available 24*7