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FINANCIAL ACCOUNTING

QUIZ #1
SUMMER 2001

NAME____________________________________

There are 50 points on this quiz. SHOW and LABEL your work to receive full and/or
partial credit.

I. 10 points - Multiple Choice. CIRCLE the letter with the best answer.

1. The statement of cash flows communicates:


a. assets, liabilities, and shareholders' equity at a point in time.
b. revenues less expenses during a period of time.
c. beginning balance plus income less dividends.
d. operating, investing, and financing activities.

2. A member of the board of directors is:


a. A person who provides money to a company with the expectation that it will be paid
back with interest.
b. A person who provides money to a company which never has to be paid back but
periodic cash payments are expected.
c. A person who provides money to a company as a gift with a stipulation that it will be
used as agreed to in a contract between the parties involved.
d. A representative of the stockholders who guides the corporation by making
decisions concerning top management compensation, dividend payments, and other
major decisions about the corporation.

3. A potential short-term debt investor who is concerned that the firm might already have
too much debt would be most interested in the firm's:
a. current ratio
b. return on sales
c. debt/equity ratio
d. dividend yield
e. accounts receivable turnover

4. The Securities and Exchange Commission is/are:


a. The federal agency responsible for collecting federal taxes and enforcing tax law.
b. Individuals employed in the private sector that set accounting rules followed in the
preparation of financial statements.
c. The federal agency which is charged by Congress to set accounting rules for
companies which sell shares to the public.
d. Accounting professionals employed by federal, state, or local branches of government.
5. The independence of the auditor is subject to question when:
a. The auditor is paid by the management of the company being audited.
b. The auditor is independent.
c. The auditor is paid 1% of the reported income for the audit services provided.
d. The public accounting firm that employs the auditor also produces the audited firm's
income tax returns.

II. 10 points

Listed below are ten financial statement account names or account categories. Indicate in
the spaces to the right of each item the financial statement(s) on which the item is most
likely found. Use the following abbreviations:

Financial Statement
Balance Sheet BS
Income Statement IS
Statement of Retained Earnings RE
Statement of Cash Flow CF

Account Name or Account Category Financial Statement

Bonds Payable Balance Sheet

Cash Balance Sheet, CF

Dividends Statement of Retained Earnings

Insurance Expense Income Statement

Loss from the Sale of Equipment IS

Machinery BS

Net Cash Flow from Financing Activities CF

Prepaid Insurance BS

Proceeds from the Sale of a Building CF

Revenue IS

III. 5 points
Describe the connection between the amount of net income for a specific year and the
year-end balance sheet. The year end income would be part of retained earnings.
Retained Earnings is reported in the Stockholder Equity section of the balance sheet.
IV. 25 points

Angela Miles is considering an investment in one of two restaurants. She has narrowed
her choices to Good Food and Vegie Shack. The market prices for Good Food and Vegie
Shack common stock are $30 and $20 per share, respectively. Assume that notes payable
are current liabilities and all bonds payable are long-term liabilities.

Balance Sheets
December 31, 2000
Assets

Good Food Vegie Shack

2000 1999 2000 1999

Cash & Accounts Receivable $ 6,000 $5,000 $ 15,000 $13,500

Inventory 3,000 3,000 7,000 6,500

Plant & Equipment (net) 30,000 28,000 50,000 30,000

Other Assets 6,000 6,000 3,000 3,000

Total Assets $45,000 $42,000 $75,000 $53,000

Liabilities and Stockholders' Equity

Accounts Payable $ 4,000 $3,000 $ 5,000 $4,000

Notes Payable 3,000 1,000 10,000 5,000

Bonds Payable 15,000 20,000 30,000 25,000

Common Stock 12,000 12,000 16,000 16,000

Retained Earnings 11,000 6,000 14,000 3,000

Total Liabilities and SH Equity $45,000 $42,000 $75,000 $53,000


Income Statement
For the years ended December 31, 2000 and 1999

2000 1999 2000 1999

Sales $ 90,000 80,000 $ 180,000 170,000

Cost of Goods Sold 46,400 40,800 106,000 100,000

Gross Profit $ 43,600 39,200 $ 74,000 70,000

Selling & Administrative Exp 26,400 26,000 43,800 42,500

Net operating income $ 17,200 13,200 $ 30,200 27,500

Interest Expense 1,800 2,100 4,400 2,200

Net Income before Fed Inc Taxes $ 15,400 11,100 $ 25,800 25,300

Income Taxes (15% Tax Rate) 2,310 1,660 3,870 3,800

Net Income $ 13,090 $9,440 $ 21,930 21,500

Avg #of Shares O/S 12,000 12,000 16,000 16,000

Please compute the requested financial measures and provide the requested analysis.

Please SHOW and LABEL all computations in order to receive partial or full credit.

A. 16 points For the two companies, compute the following ratios for 2000.

Good Vegie Food Shack

1. Current Ratio 1.28 1.467

2. Debt to Equity Ratio .95 1.5

3. Return on Equity .638 .895

4. Earnings per Share $1.09 $1.37


B. 9 points Please assess the solvency and earning power of the two companies using the
information provided to you.

Solvency

Good Food

Good Food is solvent. They have enough current assets to cover current liabilities.
Using the Quick ratio they cannot cover all the current liabilities.
The 1999 ratios were stronger than 2000 so they are less solvent than the prior year.

Vegie Shack

They are solvent and can cover current liabilities with current assets. Their ratio is
stronger than Good Foods. They have a quick ratio where all liabilities are covered. The
1999 ratios were stronger than the 2000 ratio-but overall they are still in good shape.

Earning Power

Good Food

Good Food has a .638 ROE The higher the ratio, the more income is earned for the
stockholders. The EPS = $1.09. This means that each share of stock is earning $1.09

Vegie Shack

Vegie Shack has a .895 ROE which is stronger than Good Foods. Their EPS is also
larger at $1.37. They appear to be the better company in both solvency and earning
power.

Vegie Shack uses more debt than Good Food, but with a strong Current ratio they can
pay this debt.