MANAGEMENT ACCOUNTING, PART 1

PRELIM DEPARTMENTAL EXAM REVIEWER

THEORIES

I: MULTIPLE CHOICE

1. Carlos company issued bonds with interest rates of 10%. The company’s return on assets is
12%. The company’s return on common stockholders’ equity would most likely:
a. Increase
b. Decrease
c. Remain unchanged
d. Cannot be determined
2. Which of the following transactions could generate positive financial leverage for a
corporation?
a. Acquiring assets through the issuance of long-term debt
b. Acquiring assets through the use of accounts payable
c. Acquiring assets through the issuance of common stock
d. Both A and B above
3. Book value per common share is the amount of stockholders’ equity per outstanding share
of common stock. Which one of the following statements about book value per common
share is most correct?
a. Market price per common share approximates book value per common share
b. Book value per common share is based on past transactions where as the market
price of a share of stock mainly reflects what investors expect to happen in the
future
c. A market price per common share that is greater than book value per common
share is an indication of an overvalued stock
d. Book value per common share is the amount that would be paid to stockholders if
the company were sold to another company.
4. A company has just converted long-term note receivable into a short-term note receivable.
The company’s acid test and current ratios are both greater than 1. This transaction will:
a. Increase the current ratio and decrease the acid-test ratio
b. Increase the current ratio and increase the acid-test ratio
c. Decrease the current ratio and increase the acid-test ratio
d. Decrease the current ratio and decrease the acid-test ratio
5. BERNARDO Corporation has a current ratio of 2.5. Which of the following transactions will
increase BERANARDO’s current ratio?
a. The purchase of inventory for cash
b. The collection of an account receivable
c. The payment of an account payable
d. None of the above
6. ALBERTO Company’s average collection period for accounts receivable was 25 days in year
1, but increased to 40 days in year 2. Which of the following would most likely be the cause
of this change:
a. A decrease in accounts receivable relative to sales in year 2
 b. An increase in credit sales in year 2 as compared to year 1
c. A relaxation of credit policies in year 2
d. A decrease in accounts receivable in year 2 as compared to year 1
7. WENDA Company wrote off $100,000 in obsolete inventory. The company’s inventory
turnover ratio would:
a. Increase
b. Decrease
c. Remain unchanged
d. Impossible to determine
8. Trend analysis is analysis
a. Of percentage changes over several years
b. In which all items are presented as a percentage of one selected item on a financial
statement
c. In which a statistic is calculated for the relationship between two items on a single
financial statement or for two items on different financial statements
d. Of all ratios that increased or decreased over past accounting periods.
9. For meaningful analysis, ratios are best compared with
a. Historical company averages
b. Industrial averages
c. Historical and industrial averages
d. No standard

MATCHING

Match the classifications of ratio with each description

a. LIQUIDITY RATIO
b. LEVERAGE RATIO
c. PROFITABILITY RATO
d. HORIZONTAL ANALYSIS
e. TREND ANALYSIS

10. Measures the earning ability of a company

11. Measures the ability of a company to meet long and short term obligations
12. Measures the degree of protection provided to company creditors
13. Measure the ability of the company to meet its current obligations
14. Allows evaluation of the extent to which funds are used efficiently

For each of the following items, indicate by using the appropriate code letter, how the item should be
reported in the statement of cash flows, using the indirect method.
a. Added to net income
b. Deducted from net income
c. Cash outflow--investing activity
d. Cash inflow--investing activity
e. Cash outflow--financing activity
f. Cash inflow--financing activity
g. significant noncash investing and financing activity

15. Decrease in accounts payable during a period.

16. Declaration and payment of a cash dividend.
17. Loss on sale of land.
 18. Decrease in accounts receivable during a period.
19. Redemption of bonds for cash.
20. Proceeds from sale of equipment at book value.
21. Issuance of common stock for cash.
22. Purchase of a building for cash.
23. Acquisition of land in exchange for common stock.
24. Increase in merchandise inventory during a period.

COMPLETION

25. The detailed formulation of action to achieve a particular end is the management activity
called_____________.
26. The process of choosing among competing alternatives is called ________________________.

27. The _____________________ is the set of activities required to design, develop, produce, market
and deliver products and services as well as provide support services to customers.
28. __________________________________________ is a management philosophy in which manufacturers
strives to create an environment that will enable workers to manufacture perfect (zero-
defect) products.
29. The________________supervises all accounting functions and reports directly to the general
manager and chief operating officer (COO).
30. Positions that are supportive in nature and have only indirect responsibility for an
organization’s basic objectives are called ________________________.
31. The ____________________ is responsible for the finance function.
32. To promote ethical behavior by managers and employees, organizations commonly
establish a__________________________.

PROBLEMS

33. Adoracion Company's net income last year was $500,000. The company has 150,000 shares
of common stock and 30,000 shares of preferred stock outstanding. There was no change in
the number of common or preferred shares outstanding during the year. The company
declared and paid dividends last year of $1.00 per share on the common stock and $0.70 per
share on the preferred stock. The earnings per share of common stock is closest to:
a. $3.33
b. $3.19
c. $2.33
d. $3.47

34. Richmond Company has 100,000 shares of $10 par value common stock issued and
outstanding. Total stockholders' equity is $2,800,000 and net income for the year is
$800,000. During the year Richmond paid $3.00 per share in dividends on its common
stock. The market value of Richmond's common stock is $24. What is the price-earnings
ratio?

a. 3.0
b. 3.5
 c. 4.8
d. 8.0

35. Hilario Company has 20,000 shares of common stock outstanding. These shares were
originally issued at a price of $15 per share. The current book value is $25.00 per share and
the current market value is $30.00 per share. The dividends on common stock for the year
totaled $45,000. The dividend yield ratio is:
a. 9%
b. 7.5%
c. 15%
d. 10%
36. ARMANDO Corporation's net income last year was $7,975,000. The dividend on common
stock was $8.20 per share and the dividend on preferred stock was $3.50 per share. The
market price of common stock at the end of the year was $59.10 per share. Throughout the
year, 500,000 shares of common stock and 200,000 shares of preferred stock were
outstanding. The dividend payout ratio is closest to:
a. 1.06
b. 0.51
c. 0.56
d. 1.29
37. DOROTHY Company's working capital is $10,000 and its current liabilities are $84,000. The
company's current ratio is closest to:
a. 0.88
b. 0.12
c. 9.40
d. 1.12
38. EVERISTO Company has $13,000 in cash, $7,000 in marketable securities, $27,000 in
accounts receivable, $20,000 in inventories, and $30,000 in current liabilities. The
company's current assets consist of cash, marketable securities, accounts receivable, and
inventory. The company's acid-test ratio is closest to:
a. 1.57
b. 0.90
c. 1.33
d. 2.23
39. Graber Company had $130,000 in sales on account last year. The beginning accounts
receivable balance was $18,000 and the ending accounts receivable balance was $12,000.
The company's average collection period was closest to:
a. 33.69 days
b. 42.12 days
c. 84.23 days
d. 50.54 days
40. Ira Company, a retailer, had cost of goods sold of $160,000 last year. The beginning
 inventory balance was $26,000 and the ending inventory balance was $24,000. The
company's average sale period was closest to:
a. 114.06 days
b. 54.75 days
c. 59.31 days
d. 57.03 days
41. Last year Jar Company had a net income of $290,000, income tax expense of $66,000, and
interest expense of $20,000. The company's times interest earned was closest to:
a. 10.20
b. 14.50
c. 15.50
d. 18.80
42. Brewster Company's debt-to-equity ratio is 0.8. Current liabilities total $100,000 and long
term liabilities total $200,000. Brewster Company's total assets must be:
a. $375,000
b. $450,000
c. $550,000
d. $675,000
43. Dalaga Company has a quick ratio of 2.5 to 1. It has current liabilities of $40,000 and non-
current assets of $70,000. If Dalaga’s current ratio is 3.1 to 1 its inventory and prepaid
expenses must be
a. 20000
b. 25500
c. 24000
d. 23500
44. Total operating expenses on Harmon Company's income statement for last year totaled
$370,000. During the year accrued liabilities increased by $18,000, and prepaid expenses
increased by $25,000. Depreciation expense for the year was $45,000. Based on this
information, operating expenses adjusted to cash basis under the direct method on the
statement of cash flows would be
a. $318000
b. $332000
c. $422000
d. $408000

NUMBERS 45 TO 47 ARE BASED ON THE FOLLOWING INFORMATION:

Chandler Company's net income last year was $98,000 and cash dividends declared and paid to the
company stockholders was $13,000. Changes in selected balance sheet accounts for the year appear
below:
Increases
(Decreases)
Debit balances:
Cash $ (3,000)
Accounts receivable 1,000
Inventory (1,000)
Prepaid expenses 13,000
Long-term investments 70,000
Plant and equipment 45,000

Credit balances:
Accumulated depreciation 61,000
Accounts payable (11,000)
Accrued liabilities (9,000)
Taxes payable 9,000
Bonds payable (50,000)
Common stock 40,000
Retained earnings 85,000

45. The netcash flows from operating activities to be reported in a statement of cash flows is
a. $135,000
b. $98,000
c. $159,000
d. $74,000
46. The netcash flows from investing activities to be reported in a statement of cash flows is
a. $(75,000)
b. $75000
c. $(115,000)
d. $115,000
47. The netcash flows from financing activities to be reported in a statement of cash flows is
a. $10,000
b. $(10,000)
c. $23,000
d. $(23,000)
48. The following transactions occurred last year at Dempsey Inc.

Issuance of common stock $ 50,000

Dividends paid to common stockholders 3,000
Depreciation expense 6,000
Repayment of principal on the company's own bonds 40,000
Sale of equipment 17,000
Purchase of land 120,000

Based solely on the above information, the net cash flows from financing activities for the
year on the statement of cash flows would be
a. $249,000
b. $7,000
c. $(103,000)
d. $(6,000)
49. Land costing $78,000 was sold for $93,000 cash. The gain on the sale was reported on the
income statement as other income. On the statement of cash flows, what amount should be
reported as an investing activity from the sale of land?
a. $ 78,000
b. $ 108,000
c. $ 93,000
 d. $ 15,000

ANSWER KEY:

1. A
2. D
3. B
4. B
5. C
6. C
7. A
8. A
9. C
10. C
11. B
12. B
13. A
14. C
15. B
16. E
17. A
18. A
19. E
20. D
21. F
22. C
23. G
24. B
25. PLANNING
26. DECISION MAKING
27. VALUE CHAIN
28. TOTAL QUALITY MANAGEMENT
29. CONTROLLER
30. STAFF POSITIONS
31. TREASURER
32. CODE OF CONDUCT
33. B

Earnings per share = (Net Income − Preferred Dividends)

Average number of common shares outstanding

= ($500,000 − $21,000) ÷ [(150,000 shares + 150,000 shares) ÷ 2] = $3.19 per share

34. A
 Price-earnings ratio = Market price per share ÷ Earnings per share*

= $24 ÷ $8 = 3.0
35. B
Dividend yield ratio = Dividends per share ÷ Market price per share
= ($45,000 ÷ 20,000) ÷ $30.00 = 7.5%
36. C
Dividend payout ratio = Dividends per share ÷ Earnings per share*
= $8.20 ÷ $14.55 = 0.56
37. D
Current ratio = Current assets ÷ Current liabilities
= ($84,000 + $10,000) ÷ $84,000 = 1.12
38. A
Acid-test ratio = Quick assets* ÷ Current liabilities
= $47,000 ÷ $30,000 = 1.57
39. B
Average collection period = 365 days ÷ Accounts receivable turnover*
= 365 days ÷ 8.6667 = 42.12 days
40. D
Average sale period = 365 days ÷ Inventory turnover*
= 365 days ÷ 6.4 = 57.03 days
41. D
Times interest earned = Net operating income ÷ Interest expense
= ($290,000 + $66,000 + $20,000) ÷ $20,000 = 18.80
42. D
Debt-to-equity ratio = Liabilities ÷ Stockholders' equity

= ($100,000 + $200,000) ÷ Stockholders' equity = 0.8

Stockholders' equity = $300,000 ÷ 0.8 = $375,000

Total assets = Liabilities + Stockholders' equity = $300,000 + $375,000= $675,000

43. C
= 40,000 x 2.5 =100,000
= 40,000 x 3.1 = 124,000
124,000-100,000 = $24,000
44. B

Operating Expenses 370,000

Prepaid Expense 25000
Accrued Expense -18000
Depreciation Expense -45000
Operating Expenses - Cash Basis 332,000
45. A
 Net Income 98000
Accounts Receivable -1000
Inventory 1000
Prepaid expense -13000
Depreciation 61000
Accounts Payable -11000
Accrued Liabilities -9000
Taxes Payable 9000
Net Cash Flow from Operating 135000

46. C
Plant and Equipment -45000
Long-term Investments -70000
-
Net Cash Flows from Investing 115000

47. D
Issuance of Common Stock 40000
Bonds Payable -50000
Payment of dividends -13000
Net Cash Flows from Financing -23000

48. B
Issuance of Common Stock 50000
Payment of dividends -3000
Repayment of Principal -40000
Net Cash Flows from Financing 7000

49. C