Achievement Test 7: Chapters 13-14 Name ___________________________

Managerial Accounting, 5e Instructor ________________________

Section # _________ Date __________

Part I II III IV Total

Points 28 27 15 30 100

Score

PART I — MULTIPLE CHOICE (28 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Cash provided by operating activities

a. may be larger than net income.
b. equals the change in cash for the year.
c. summarizes cash flows relating to the purchase and sale of long-lived assets.
d. decreases when long-term debt is repaid.

____ 2. Cindy's Cookie Shop reported equipment at $240,000 and $48,000 accumulated
depreciation on its December 31, 2010, balance sheet. During 2011, the shop
purchased equipment costing $40,000 and sold equipment costing $10,000 (book
value $7,200) for $2,000. On December 31, 2011, net equipment was $174,800. Using
the indirect method, Cindy’s would report depreciation expense on its statement of
cash flows for 2011 of
a. $95,200.
b. $54,400.
c. $47,200.
d. $49,000.

____ 3. Short-term liquidity ratios include the

a. profit margin ratio.
b. payout ratio.
c. debt to total assets ratio.
d. acid-test ratio.

____ 4. Parker Paint reported sales of $600,000, total assets of $300,000, total stockholders'
equity of $160,000, current assets of $100,000, current liabilities of $40,000, and cash
of $24,000. In a common size balance sheet, cash would be shown as
a. 60%.
b. 8%.
c. 24%.
d. 4%.
AT7- 2 Test Bank for Managerial Accounting, Fifth Edition

____ 5. The use of common size financial statements is an example of

a. ratio analysis.
b. vertical analysis.
c. liquidity analysis.
d. horizontal analysis.

____ 6. The purchase of an office building by issuing long-term notes payable should be
reported as a
a. cash outflow in the financing section of the statement of cash flows.
b. cash outflow in the investing section of the statement of cash flows.
c. cash outflow in the operating section of the statement of cash flows.
d. noncash investing and financing activity.

____ 7. As an indicator of financial health, a low ratio is desirable for the

a. asset turnover ratio.
b. return on assets ratio.
c. acid-test ratio.
d. debt to total assets ratio.

____ 8. Stanley Company had inventory of $660,000 and $540,000 on December 31, 2010,
and December 31, 2011, respectively. Cost of goods sold for 2011 was $3,000,000.
Average days to sell the inventory is approximately
a. 73.0.
b. 5.0.
c. 65.2.
d. 5.6.

____ 9. Which of the following statements is true?

a. The price-earnings ratio is a long-term solvency ratio.
b. High asset turnover is a sign of efficient use of assets.
c. The payout ratio measures the profitability of the owners' investment.
d. The acid-test ratio applies to manufacturing companies but not to service or
retailing businesses.

____ 10. When using the direct method to compute cash provided by operations,
a. income taxes paid may be ignored.
b. depreciation expense is added to net income.
c. decreases in inventory are added to total operating expenses to compute cash
payments for operating expenses.
d. increases in accounts receivable are subtracted from total sales to compute cash
receipts from customers.

____ 11. Profitability ratios include

a. times interest earned.
b. inventory turnover.
c. the payout ratio.
d. the acid-test ratio.
 Achievement Test 7 AT7- 3

____ 12. In the statement of cash flows, the activities that affect cash flows are listed in the
following order:
a. investing, financing, operating
b. operating, financing, investing
c. financing, operating, investing
d. operating, investing, financing

____ 13. A transaction involving a loss on the sale of equipment affects cash provided (used) by
a. operations and investing activities.
b. operations and financing activities.
c. financing activities and investing activities.
d. operations, financing activities, and investing activities.

____ 14. One major purpose of the statement of cash flows is to provide information about
a. the firm's profitability.
b. the firm's cash receipts and payments during a period.
c. the firm's resources and claims against those resources.
d. changes in retained earnings.

PART II — RATIO ANALYSIS (27 points)

Financial statements for Gordon Corporation are presented below.

GORDON CORPORATION
Comparative Balance Sheet
December 31
2011 2010
Assets
Cash................................................................................................ $ 4,000 $ 6,000
Accounts receivable (net)................................................................ 32,000 24,000
Inventory......................................................................................... 20,000 18,000
Land................................................................................................ 12,000 8,000
Machinery........................................................................................ 62,000 48,000
Accumulated depreciation............................................................... (20,000) (14,000)
Total assets............................................................................... $110,000 $90,000

Liabilities and Stockholders' Equity

Accounts payable............................................................................ $ 20,000 $16,000
Long-term notes payable................................................................. 35,000 29,000
Common stock ($10 par value)........................................................ 40,000 40,000
Retained earnings........................................................................... 15,000 5,000
Total liabilities and stockholders' equity..................................... $110,000 $90,000
AT7- 4 Test Bank for Managerial Accounting, Fifth Edition

PART II — RATIO ANALYSIS (cont.)

GORDON CORPORATION
Income Statement
For the year ended December 31, 2011

Sales................................................................................................................. $360,000
Less: Sales returns and allowances.................................................................. 10,000
Net sales........................................................................................................... $350,000
Cost of goods sold............................................................................................ 275,000
Gross profit....................................................................................................... 75,000
Selling expenses............................................................................................... 21,000
Administrative expenses................................................................................... 14,000
Income before income taxes............................................................................. 40,000
Income tax expense.......................................................................................... 12,000
Net income....................................................................................................... $ 28,000

Additional Information: All sales were on account. The market price of Gordon's common stock
was $35 on December 31, 2010, and $42 on December 31, 2011.

Instructions: Compute the indicated ratios at December 31, 2011, or for the year ended
December 31, 2011, as appropriate. Report answers to one decimal place.

1. Return on assets is _________________________________________________________.

2. Acid-test ratio is ___________________________________________________________.

3. Profit margin is ____________________________________________________________.

4. Payout ratio is _____________________________________________________________.

5. Debt to total assets ratio is ___________________________________________________.

6. Asset turnover is ___________________________________________________________.

7. Receivables turnover is ______________________________________________________.

8. Price-earnings ratio is _______________________________________________________.

9. Current ratio is ____________________________________________________________.

 Achievement Test 7 AT7- 5

PART III — STATEMENT OF CASH FLOWS CLASSIFICATIONS (15 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. Issued checks for the weekly payroll

_____ 2. Paid an account payable

_____ 3. Issued bonds payable for cash

_____ 4. Declared and paid a cash dividend

_____ 5. Paid cash for a new car for a traveling salesperson

_____ 6. Purchased treasury stock for cash

_____ 7. Paid cash for 40% interest in another company

_____ 8. Received interest on a long-term bond investment

_____ 9. Converted bonds payable into common stock

_____ 10. Sold a long-term stock investment for cash at book value
AT7- 6 Test Bank for Managerial Accounting, Fifth Edition

PART IV — STATEMENT OF CASH FLOWS — Indirect Method (30 Points)

Condensed financial data for Yount Corporation are given below.

YOUNT CORPORATION
Comparative Balance Sheet
December 31

Assets
2011 2010
Cash $ 136,000 $ 40,000
Accounts receivable 78,000 54,000
Inventory 200,000 230,000
Land 1,440,000 1,300,000
Equipment 986,000 916,000
Accumulated depreciation (80,000) (40,000)
Total assets $2,760,000 $2,500,000

Liabilities and Stockholders' Equity

Accounts payable $ 104,000 $ 24,000
Accrued expenses payable 42,000 48,000
Bonds payable 1,150,000 1,150,000
Common stock 1,348,000 1,208,000
Retained earnings 116,000 70,000
Total liabilities and stockholders’ equity $2,760,000 $2,500,000

Additional information for 2011:

1. A cash dividend of $30,000 was declared and paid during the year.
2. Additional equipment was purchased for cash.
3. Land was acquired by issuing common stock.

Instructions: Prepare a statement of cash flows for 2011 using the indirect method.
 Achievement Test 7 AT7- 7

Solutions — Achievement Test 7: Chapters 13-14

PART I — MULTIPLE CHOICE (28 points)

1. a 6. d 11. c
2. d 7. d 12. d
3. d 8. a 13. a
4. b 9. b 14. b
5. b 10. d

PART II — RATIO ANALYSIS (27 points)

1. 28.0 6. 3.5
2. 1.8 7. 12.5
3. 8.0 8. 6.0
4. 64.3 9. 2.8
5. .50

PART III — STATEMENT OF CASH FLOWS CLASSIFICATIONS (15 points)

1. F 6. D
2. F 7. B
3. C 8. E
4. D 9. G
5. B 10. A

PART IV — STATEMENT OF CASH FLOWS — Indirect Method (30 points)

YOUNT CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flows from operating activities
Net income $ 76,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation expense $40,000
Increase in accounts receivable (24,000)
Decrease in inventory 30,000
Increase in accounts payable 80,000
Decrease in accrued expenses payable (6,000) 120,000
Net cash provided by operating activities 196,000
Cash flows from investing activities
Purchase of equipment (70,000)
Net cash used by investing activities (70,000)
Cash flows from financing activities
Payment of dividends (30,000)
Net cash used by financing activities (30,000)
Net increase in cash 96,000
Cash at beginning of period 40,000
Cash at end of period $136,000
Noncash investing and financing activities
Land was acquired by issuing common stock $140,000