Achievement Test 6: Chapters 11-13 Name __________________________
Accounting Instructor _______________________
Kimmel, Weygandt, & Kieso Section # _______ Date _________
Part
I
II
III
IV
V
VI
VII
Total
Points
36
6
6
10
12
10
20
100
Score
PART I — MULTIPLE CHOICE (36 points)
Instructions: Designate the best answer for each of the following questions.
____ 1. Which of the following is a disadvantage of the corporate form of business entity?
a. Unlimited liability of stockholders
b. Continuous life
c. Lack of government regulation
d. Double taxation
____ 2. What effect occurs when a stock split is declared?
a. Total assets and total stockholders’ equity increase.
b. Part of retained earnings is transferred to paid-in capital.
c. The par value decreases and the number of shares increase.
d. Ownership interests of each stockholder are increased.
____ 3. What occurs to stockholders’ equity when a company incurs a net loss for the current
period?
a. Total retained earnings is reduced before reporting the ending balance on the
balance sheet.
b. Paid-in capital is reduced with a debit amount.
c. A deficit is reported for retained earnings on the balance sheet.
d. Total retained earnings becomes restricted and dividends may not be distributed.
____ 4. How may a company increase its return on common stockholders’ equity?
a. Increase its reliance on debt
b. Reduce its return on assets
c. Reduce net income
d. Issue more stock
____ 5. Which of the following is a correct statement concerning the reporting of stockholders’
equity on the balance sheet?
a. Three classifications are reported in paid-in capital: capital stock, additional paid-in
capital, and treasury stock.
b. Additional paid-in capital represents the total amounts received from the issuance
of stock since the company began.
c. The paid-in capital section includes capital stock and additional paid-in capital.
d. Common stock is presented before preferred stock.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT6-2
____ 6. Tangiers Company reported a loss of $1,300 for the sale of equipment for cash. The
equipment had a cost of $32,000 and accumulated depreciation of $29,500. How
much will Tangiers report in the cash flows from investing activities section of its
statement of cash flows?
a. $1,200
b. $1,300
c. $30,700
d. $3,800
_____ 7. What is sustainable income?
a. The most likely level of income to be obtained in the future
b. The net cash generated from operating activities
c. Income from operations
d. Comprehensive income
____ 8. Which one of the following is not one of the most common types of comparisons used
to improve the decision usefulness of financial information?
a. Industry averages
b. Intracompany basis
c. Intercompany basis
d. Sustainable basis
____ 9. Marsh Company purchased a factory building by issuing long-term notes payable.
How will Marsh report this purchase?
a. As a cash outflow in the financing section and a cash inflow in the investing
activities section of the statement of cash flows
b. As a cash outflow in the investing section of the statement of cash flows
c. As a cash outflow in the operating section of the statement of cash flows
d. As a significant noncash activity
____ 10. Which of the following is the best way to evaluate a series of financial statement data
over a period of time?
a. Common size statements
b. Trend analysis
c. Vertical analysis
d. Ratio analysis
____ 11. What do solvency ratios measure?
a. The level of full and transparent information provided to users of the financial
statements
b. The profitability of a company
c. The ability of a company to survive over a long period of time
d. The ability of a company to pay its debts as they come due
____ 12. During which of the following phases does a company generate the largest amount of
operating activities?
a. Introductory phase
b. Maturity phase
c. Decline phase
d. Growth phase
Achievement Test 6
AT6-3
____ 13. A company’s net cash provided by operating activities is approximately the same as
its net income. During which phase is this company most likely in?
a. Introductory phase
b. Maturity phase
c. Decline phase
d. Growth phase
____ 14. Which type of activity is generally considered to be the best measure of a company’s
ability to continue as a going concern?
a. Cash flows from operating activities
b. Cash flows from investing activities
c. Cash flows from financing activities
d. Cash flows from operating activities and cash flows from investing activities
____ 15. Which one of the following is not one of the major purposes of the statement of cash
flows?
a. It provides information about the company’s ability to pay dividends.
b. It provides information about the firm’s ability to meet its obligations.
c. It provides information about the firm’s resources and claims against those
resources.
d. It provides information about the company’s ability to generate cash flows.
____ 16. What is the most common abuse by managers in achieving increased earnings in
order to cope with the pressures from Wall Street?
a. Selling more shares of stock than authorized
b. Capitalizing expenses that should be expensed
c. Under reporting liabilities
d. Improper recognition of revenue
____ 17. Which of the following is considered to be an acceptable format for reporting a
company’s ‘income’?
a. As note disclose to the financial statements
b. As a combined statement of income and comprehensive income
c. As a separate component of operating expenses on the income statement
d. As a component on the statement of retained earnings
____ 18. Several investors are anticipating an investment in a company that has performed
quite well over the past few years. Which of the following income statement amounts
will likely be the best indicator of the company’s future performance?
a. Gross profit
b. Sustainable earnings
c. Net income
d. Comprehensive income
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT6-4
PART II — DIVIDENDS (6 points)
PetSafe had 8,000 shares of 3%, $8 par value preferred stock and 50,000 shares of $0.50 par
value common stock outstanding throughout 2014. Total dividends declared in 2014 were $8,000.
The preferred stock is cumulative with no dividends paid during 2012 and 2013.
Instructions: Determine the amount of dividends to be paid to the common and preferred
stockholders in 2014.
Common ____________________________ Preferred _______________________________
PART III —HORIZONTAL AND VERTICAL ANALYSIS (8 points)
The comparative balance sheets of Lander Rosen Clothiers are as follows:
December 31, 2014 December 31, 2013
Cash $ 60,000 $ 42,000
Accounts receivable 32,000 20,000
Inventory 48,000 38,000
Total assets 600,000 580,000
Instructions: Perform horizontal and vertical analysis for Lander Rosen Clothiers. Express your
answers with 2 decimal places.
Horizontal
Vertical
Achievement Test 6
AT6-5
PART IV — STOCK ENTRIES (16 points)
Malibu Company uses the chart of accounts shown below.
Account Titles
1. Cash
7. Paid-in Capital in Excess of Par Value—Preferred Stock
2. Accounts Receivable
8. Paid-in Capital in Excess of Par Value—Common Stock
3. Sales Revenue
9. Treasury Stock
4. Dividends Payable
10. Cash Dividends
5. Preferred Stock
11. Stock Dividends
6. Common Stock
Instructions: Use the numbers preceding each account title to create journal entries for each
situation. Account titles may be used more than once, or not at all, and journal entries may have
multiple accounts. Item 0 is provided as an example.
Entry Information
Account(s)
Debited
Account(s)
Credited
Amount
0
Collected cash from a customer, $400
1
2
$ 400
1
Received authorization from the State for 40,000
shares of $0.40 par value common stock
$
2
Issued 5,000 shares common stock for $8 per share
$
3
Declared a $0.60 cash dividend per share to
common stockholders
$
4
Purchased 2,000 shares of the company’s own
common stock at $11 per share
$
5
Paid the dividends previously declared
$
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT6-6
PART V — RATIO ANALYSIS (12 points)
Selected financial information for Raynor Corporation as of December are presented below.
2014 2013
Current assets ………………………………………………………………………. $100,800 $ 77,000
Current liabilities …………………………………………………………………… 42,000 35,000
Stockholders’ equity ………………………………………………………………. 120,000 106,000
Total assets …………………………………………………………………………. 300,000 270,000
Additional Information: Net sales and net income for 2014 were $450,000 and $36,000
respectively. Dividends of $4,000 were declared for common stockholders and $6,000 for
preferred shareholders in 2014.
Instructions: Compute the indicated ratios at December 31, 2014, or for the year ended
December 31, 2014, as appropriate. Display answers to two decimal places.
1. Return on assets ______________
2. Profit margin _______________
3. Payout ratio ________________
4. Debt to assets ratio _________________
5. Current ratio ________________
6. Return on common stockholders’ equity _______________
Achievement Test 6
AT6-7
PART VI — STATEMENT OF CASH FLOWS CLASSIFICATIONS (10 points)
Instructions: Each of the events below may have an effect on the statement of cash flows.
Designate how the event should be reported within the statement of cash flows using the codes
provided below. Codes may be used more than once, or not at all.
Codes
A. Investing activity; cash inflow
B. Investing activity; cash outflow
C. Financing activity; cash inflow
D. Financing activity; cash outflow
E. Operating activity; cash inflow
F. Operating activity; cash outflow
G. Noncash investing and financing activity
Events
_____ 1. Collected amounts past due from customers
_____ 2. Converted bonds payable into common stock
_____ 3. Paid the utility bill
_____ 4. Issued checks to employees
_____ 5. Issued a note payable for cash
_____ 6. Paid dividends to stockholders
_____ 7. Paid an account payable
_____ 8. Sold an old delivery truck for cash at book value
_____ 9. Paid interest due on a long-term loan
_____ 10. Paid cash for 40% interest in another company
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT6-8
*Note to Instructor: Either the direct or indirect method should be used for Part VII, but not both.
PART VII — STATEMENT OF CASH FLOWS — Indirect Method* (20 Points)
Traynham Company runs a retail company and recently completed its third year of operations.
The balance sheet and income statement follow:
Assets
2014
2013
Income Statement for 2014
Cash
$ 53,000
$ 58,100
Sales revenue
$337,400
Accounts receivable
21,000
24,300
Cost of goods sold
204,000
Inventory
30,800
29,200
Depreciation expense
4,300
Equipment
123,000
92,000
Other expenses
87,000
Accumulated depreciation
28,500
24,200
Income taxes
14,500
Total assets
$199,300
$179,400
Net income
$ 27,600
Liabilities and Equity
Accounts payable
$ 36,300
$ 33,000
Income taxes payable
11,000
8,000
Long-term notes payable
28,000
36,000
Common stock, $2 par
15,000
12,000
Paid-in capital in excess of par
38,000
31,000
Retained earnings
71,000
59,400
Total liabilities and equity
$199,300
$179,400
Additional Information on Year 2014 Transactions
1. Purchased equipment by paying signing a long-term note for $8,000 and paying cash
2. Paid cash as a payment on the long-term notes payable
3. Issued 100 shares of common stock for cash
4. Declared and paid cash dividends of $16,000
Instructions: Prepare a statement of cash flows for 2014 using the indirect method.
Achievement Test 6
AT6-9
PART VII — STATEMENT OF CASH FLOWS — Direct Method* (20 Points)
Traynham Company runs a retail company and recently completed its third year of operations.
The balance sheet and income statement follow:
Assets
2014
2013
Income Statement for 2014
Cash
$ 53,000
$ 58,100
Sales revenue
$337,400
Accounts receivable
21,000
24,300
Cost of goods sold
204,000
Inventory
30,800
29,200
Depreciation expense
4,300
Equipment
123,000
92,000
Other expenses
87,000
Accumulated depreciation
28,500
24,200
Income taxes
14,500
Total assets
$199,300
$179,400
Net income
$ 27,600
Liabilities and Equity
Accounts payable
$ 36,300
$ 33,000
Income taxes payable
11,000
8,000
Long-term notes payable
28,000
36,000
Common stock, $2 par
15,000
12,000
Paid-in capital in excess of par
38,000
31,000
Retained earnings
71,000
59,400
Total liabilities and equity
$199,300
$179,400
Additional Information on Year 2014 Transactions
1. Purchased equipment by paying signing a long-term note for $8,000 and paying cash
for the balance
2. Paid cash as a payment on the long-term notes payable
3. Issued 100 shares of common stock for cash
4. Declared and paid cash dividends of $16,000
Instructions: Prepare a statement of cash flows for 2014 using the direct method.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT6-10
Solutions — Achievement Test 7: Chapters 11-13
PART I — MULTIPLE CHOICE (36 points)
PART II — DIVIDEND COMPUTATIONS (6 points)
PART III — HORIZONTAL AND VERTICAL ANALYSIS (8 points)
PART IV — STOCK ENTRIES (10 points)
Achievement Test 6
AT6-11
PART V — RATIO ANALYSIS (12 points)
PART VI — STATEMENT OF CASH FLOWS CLASSIFICATIONS (10 points)
PART VII — STATEMENT OF CASH FLOWS — Indirect Method (20 points)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
AT6-12
PART VII — STATEMENT OF CASH FLOWS — Direct Method (20 points)