FINANCIAL ACCOUNTING QUIZ #1 SUMMER There are 50 points on this quiz. SHOW and LABEL your work to receive full and/or partial credit.

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1 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.

2 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 Income Statement Statement of Retained Earnings Statement of Cash Flow RE Account Name or Account Category Bonds Payable Cash Dividends Insurance Expense Loss from the Sale of Equipment Machinery Net Cash Flow from Financing Activities Prepaid Insurance Proceeds from the Sale of a Building Revenue Financial Statement Balance Sheet Balance Sheet, Statement of Retained Earnings Income Statement 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.

3 IV. 25 points Angela Miles is considering an investment in one of two restaurants. She has narrowed her choices to and. The market prices for 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 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

4 Income Statement For the years ended December 31, 2000 and Sales $ 90,000 80,000 $ 180, ,000 Cost of Goods Sold 46,400 40, , ,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 Good Vegie Food Shack 1. Current Ratio Debt to Equity Ratio Return on Equity Earnings per Share $1.09 $1.37

5 B. 9 points Please assess the solvency and earning power of the two companies using the information provided to you. Solvency 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. They are solvent and can cover current liabilities with current assets. Their ratio is stronger than s. 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 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 has a.895 ROE which is stronger than s. Their EPS is also larger at $1.37. They appear to be the better company in both solvency and earning power. uses more debt than, but with a strong Current ratio they can pay this debt.