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3 Modeling Readiness Quiz 3 9. (6 points) Principal repaid to creditors is a loss for the company and is therefore included on the income statement as an expense. True False 10. (8 points) AccrueCo s employees work in Year 1, but AccrueCo pays them their salary of \$55 for Year 1 in Year 2. Fill in the table below with amounts from AccrueCo s perspective. Expenses Payments 11. (8 points) In Year 1, DeferCo pays \$43 in advance to its advertising agency for advertising to be designed and aired in Year 2. Fill in the table below with amounts from DeferCo s perspective. Do NOT enter negative numbers for expenses or payments. Expenses Payments 12. (9 points) For simplicity, you may assume that all salaries are on credit. Beginning salary payable = \$456 Ending salary payable = \$193 Salary expense during the year = \$419 Salaries paid during the year =? 13. (10 points) For simplicity, you may assume that all insurance is paid in advance. Beginning prepaid insurance = \$100 Ending prepaid insurance = \$198 Insurance expense during the year = \$345 Insurance payments during the year =?

4 Modeling Readiness Quiz 4 Answers to Part 1 1. False 2. False 3. Revenues 70 Receipt from customers Revenues 65 Receipt from customers False 8. False 9. False 10. Expenses 55 Payments Expenses 43 Payments

9 Modeling Readiness Quiz 9 Answers Day 1 Day 2 Day 3 Day 4 Revenues Expenses 0 0 (33) 0 Operating cash flows (15)+10=(5) (26) (29)+28=(1) 17 Investing cash flows Financing cash flows (11) Day 1 Day 2 Day 3 Revenues Expenses 0 (32) 0 Operating cash flows (15) 39 (7) Investing cash flows Day 1 Day 2 Revenues Expenses (90)+(20)=(110) (24) 4. Day 1 Day 2 Day 3 Revenues and Gains Expenses and Losses Operating cash flows Investing cash flows (60) 0 45

10 Modeling Readiness Quiz 10 Part 3: Skills needed to get the most out of the course 1. (30 points) You have the following information from the balance sheet. Beginning gross accounts receivable = \$110 Beginning allowance for bad debts = \$17 Beginning deferred revenue = \$87 Ending gross accounts receivable = \$300 Ending allowance for bad debts = \$29 Ending deferred revenue = \$42 Sales revenue for the year = \$542 Bad debt expense [appears on the income statement] for the year = \$72 Cash received from customers during the year = 2. At the beginning of Year 1, a firm buys PP&E with a cost of \$92. The expected life of the equipment is 4 years and the expected salvage value is \$12. At the end of Year 2, the accumulated depreciation of the equipment is \$61. The equipment is sold for \$46 in cash at the beginning of Year 3. Assuming that there were no other events during Year 3, fill in the table below with the text of the items and all amounts ONLY FOR YEAR 3. Ignore taxes. (4 points) Net income (4 points) Adjustment(s) to reconcile net income to operating cash flow (4 points) Operating cash flow subtotal= = (4 points) List investing cash flow item(s) in this space. (4 points) Investing cash flow subtotal = =

11 Modeling Readiness Quiz (10 points) A firm takes a loan and agrees to repay it in equal installments over a period of time. Which one of the patterns below best describes the pattern of interest expenses over time? Circle A or B or C. Interest expense B C A Time

12 Modeling Readiness Quiz Acquisitions: Acquirer s (ACo) balance sheet before it acquires TCo A +dr -cr L -dr +cr Cash 2,000 E Capital 2,000 Target s (TCo) balance sheet before it is acquired by ACo A +dr -cr L -dr +cr Cash 140 Payables 620 PP&E 1,980 E Capital 850 Retained earnings 650 ACo acquires TCo by asking TCo s shareholders to surrender their shares in exchange for ACo s shares. The market value of ACo s shares issued is \$3,900. Besides the acquisition, ACo and TCo had no other transactions. Fair value of TCo s identifiable assets and liabilities are as follows: Fair values A L Cash 140 Payables 620 PP&E 2,480 Patents 1, (25 points) Consolidated balance sheet: Show your computations in or below the table. A L E

13 Modeling Readiness Quiz AdvCo provides services to its clients. On day 1, it receives an advance payment of \$100 for which it provides services on day 2. AdvCo has no expenses except taxes. AdvCo pays \$45 in cash as taxes on day 1. Any excess tax paid on day 1 is refunded on day 2. Write only in the spaces provided below. Assume a tax rate of 40% (10 points) Balance sheet at the end of day A L E 6.2. (10 points) Income statement for day 1 Revenues Expenses other than income taxes Earnings before tax = Current tax benefit (expense) Deferred tax benefit (expense) Total tax benefit (expense) or provision for income taxes = Net income or earnings after tax = 6.3. (5 points) Operating section of the indirect cash flow statement for day 1 Net income Adjustments due to Operating cash flow = Investing cash flow = Financing cash flow = Net cash flow =

14 Modeling Readiness Quiz 14 Answers Net income [gain on sale = 46 (92-61)= 15] 15 Adjustment(s) to reconcile net income to operating cash flow Gain on sale (15) Operating cash flow = = 0 Proceeds from sale 46 Investing cash flow = =46 A +dr -cr L -dr +cr Cash 2,140 Payables 620 PP&E 2,480 Patents 1,100 E Goodwill 800 Capital 5, C Balance sheet at the end of day 1 A +dr -cr L -dr +cr Cash 55 Deferred revenue 100 Taxes refundable 5 E Deferred tax asset Income statement for day 1 Revenues 0 Expenses other than income taxes 0 Earnings before tax =0 Current tax benefit (expense) (40) Deferred tax benefit (expense) 40 Total tax benefit (expense) or provision for income taxes =0 Net income or earnings after tax = Cash flow statement for day 1 Net income 0 Adjustments due to Increase in deferred revenue [Operating receipts exceed revenues] 100 Back out non-cash deferred tax benefit (40) Increase in taxes refundable [taxes paid exceed current tax expense] (5) Operating cash flow 55 Investing cash flow 0 Financing cash flow 0 Net cash flow 55

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