1) Gamma Corporation has working capital of $840,000, and Sigma Corporation has
working capital of $620,000. Based on this information, is it safe to conclude that
Gamma is more liquid than Sigma?
2) Many companies have to monitor some of their financial statement ratios, such as the
current ratio, due to debt covenants. Selected transactions are provided below for a
company that uses a perpetual inventory system; sells its merchandise at a selling price
that exceeds cost; and had a current ratio of 1.85 before the event occurred.
Required:
In the above table, indicate whether each transaction would increase (+), decrease (-), or
not affect (0) the company’s working capital and the current ratio.
3) Company D has contribution margin of $25 per unit and a break-even point of
10,000 units. If D sells 9,999 units, what would be its net income or loss? Explain how
you calculated your answer.
4) What is a master budget, and what period of time does it cover?
5) When merchandise inventory is purchased on account, how is the accounting
equation affected? Assume a perpetual inventory system is in use.
6) If Schulze Company is using FIFO, how would the accountant compute cost of
goods sold when recording a sale under the perpetual inventory system?
7) Indicate how each event affects the elements of financial statements. Use the
following letters to record your answer in the box shown below each element. You do
not need to enter amounts.
Hico Co. performed services and earned $2,000 of a $5,000 cash advance it had
previously received from a customer.
8) Omega Company is considering purchasing equipment that would cost $60,000 and
have a useful life of 5 years. The equipment is expected to provide net cash inflows of
$17,000 per year. Omega’s cost of capital is 14%.
Required:
Estimate the internal rate of return for this capital investment. Is this an acceptable
investment?