PART I — MULTIPLE CHOICE (42 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. Andy's Cookie Shop reported equipment at $60,000 and $12,000 accumulated
amortization on its December 31, 2001, balance sheet. During 2002 the shop
purchased equipment costing $10,000 and sold equipment costing $2,500 (net book
value $1,800) for $500. On December 31, 2002, net equipment was $43,700. Using
the indirect method, Andy’s would report amortization expense on its cash flow
statement for 2002 of
a. $23,800.
b. $13,600.
c. $11,800.
d. $12,500.

____ 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. Bluestem Paint reported sales of $300,000, total assets of $150,000, total owners'
equity of $80,000, current assets of $50,000, current liabilities of $20,000, and cash
of $15,000. In a common size balance sheet, cash would be shown as
a. 75%.
b. 10%.
c. 30%.
d. 5%.

____ 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 cash flow statement.
b. cash outflow in the investing section of the cash flow statement.
c. cash outflow in the operating section of the cash flow statement.
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. Sweeney Company had inventory of $220,000 and $180,000 on December 31,
2000, and December 31, 2001, respectively. Cost of goods sold for 2001 was
$1,460,000. Days to sales in inventory is approximately
a. 50.0.
b. 7.3.
c. 45.1.
d. 8.1.

____ 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 shareholders' investment.
d. The acid test ratio applies to manufacturing companies but not to service or
retailing businesses.

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

____ 11. Profitability ratios include the

a. interest coverage ratio.
b. inventory turnover ratio.
c. payout ratio.
d. acid test ratio.
____ 12. In the cash flow statement, 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. operating activities and investing activities.
b. operating activities and financing activities.
c. financing activities and investing activities.
d. operating activities, financing activities, and investing activities.

____ 14. One major purpose of the cash flow statement 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.
RATIO ANALYSIS (18 points)
Financial statements for Gantner Corporation are presented below.

GANTNER CORPORATION
Comparative Balance Sheet
December 31
2002 2001
Assets
Cash................................................................................................ $ 4,000 $ 6,000
Accounts receivable (net)................................................................ 12,000 10,000
Inventory......................................................................................... 14,000 20,000
Land................................................................................................ 28,000 8,000
Machinery........................................................................................ 62,000 60,000
Accumulated amortization............................................................... (20,000) (14,000)
Total assets............................................................................... $100,000 $90,000

Liabilities and Shareholders' Equity

Accounts payable............................................................................ $ 10,000 $26,000
Long-term notes payable................................................................. 35,000 19,000
Common shares.............................................................................. 40,000 40,000
Retained earnings........................................................................... 15,000 5,000
Total liabilities and shareholders' equity..................................... $100,000 $90,000

RATIO ANALYSIS (cont.)

GANTNER CORPORATION
Income Statement
 For the year ended December 31, 2002

Sales................................................................................................................. $390,000
Less: Sales returns and allowances.................................................................. 10,000
Net sales........................................................................................................... $380,000
Cost of goods sold............................................................................................ 300,000
Gross profit....................................................................................................... 80,000
Selling expenses............................................................................................... 26,000
Administrative expenses................................................................................... 20,000
Income before income taxes............................................................................. 34,000
Income tax expense.......................................................................................... 15,000
Net income....................................................................................................... $ 19,000

Additional Information: All sales were on account. Common shares were issued at $10 per
share. The market price of Gantner's common shares was $32 on December 31, 2001, and $38
on December 31, 2002.

Instructions: Calculate the indicated ratios at December 31, 2002, or for the year ended
December 31, 2002, as appropriate. Report answers to two decimal places.

1. Return on assets is _________________________________________________________.

2. Acid test ratio is ____________________________________________________________.

3. Profit margin is ____________________________________________________________.

4. Payout ratio is _____________________________________________________________.

5. Debt to total assets is _______________________________________________________.

6. Asset turnover is ___________________________________________________________.

7. Receivables turnover is ______________________________________________________.

8. Price-earnings ratio is _______________________________________________________.

9. Current ratio is ____________________________________________________________.

CASH FLOW STATEMENT CLASSIFICATIONS (10 points)

Instructions: Each of the events below may have an effect on the cash flow statement.
Designate how the event should be reported within the cash flow statement 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. Paid 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 travelling salesperson

_____ 6. Repurchased shares 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 shares

_____ 10. Sold a long-term equity investment for cash at book value
PART IV — CASH FLOW STATEMENT — Indirect Method or Direct Method (30 Points)
Condensed financial data for Zimmer Corporation are given below.

ZIMMER CORPORATION
Comparative Balance Sheet
December 31

Assets
2002 2001
Cash $ 58,000 $ 20,000
Accounts receivable 34,000 27,000
Inventory 105,000 115,000
Land 720,000 650,000
Equipment 508,000 458,000
Accumulated amortization (45,000) (20,000)
Total assets $1,380,000 $1,250,000

Liabilities and Shareholders' Equity

Accounts payable $ 55,000 $ 12,000
Accrued expenses payable 18,000 24,000
Bonds payable 575,000 575,000
Common shares 674,000 604,000
Retained earnings 58,000 35,000
Total liabilities and shareholders’ equity $1,380,000 $1,250,000

ZIMMER CORPORATION
Income Statement
For the Year Ended December 31, 2002

Sales $290,000
Cost of goods sold 110,000
Gross profit $180,000
Operating expenses $90,000
Interest expense 50,000 140,000
Income before income taxes 40,000
Income tax expense 12,000
Net income $ 28,000

Additional information for 2002:

1. A cash dividend of $5,000 was declared and paid during the year.
2. Additional equipment was purchased for cash.
3. Land was acquired by issuing common shares.
4. Operating expenses include amortization expense.
5. Accounts payable pertain to purchases of merchandise.
6. Accrued expenses payable pertain to operating expenses exclusive of amortization.

Instructions: Prepare a cash flow statement for 2002 using either the indirect or the direct
method.
Criteria Level 4 (80- Level 3 (70-79%) Level 2 (60- Level 1 (0-59%) Score
100%) 69%)

Knowledge Demonstrates exceptional Demonstrates considerable Demonstrates some skills Demonstrates limited /5
skills in understanding and skills in understanding and in understanding and skills in understanding
recording accounting recording accounting recording accounting and recording accounting
transactions transactions transactions transactions

Communication Demonstrate exceptional Demonstrate considerable . Demonstrate some skill Demonstrate limited skill /5
skill in preparing financial skill in preparing financial in preparing financial in preparing financial
statements with correct statements with correct statements with correct statements with correct
Financial Statement format. format. format. format
format (2.5)
Demonstrate high skill in Demonstrate considerable Demonstrate some skill in Demonstrate limited skill
Usage of Spreadsheet using spreadsheet software. skill in using spreadsheet using spreadsheet in using spreadsheet
software (2.5) software. software. software.

Application Demonstrates excellent Demonstrates considerable Demonstrates some skill Demonstrates limited skill /10
skill in relating transactions skill in relating in relating transactions to in relating transactions to
to specific accounting cash transactions to specific specific accounting cash specific accounting cash
flow statement accounting cash flow flow statement flow statement.
statement

Thinking Demonstrate excellent skill Demonstrate moderate Demonstrate some skill in Demonstrate limited skill /10
in analyzing and justifying skill in analyzing and analyzing and justifying in analyzing and
financial figures and justifying financial figures financial figures and justifying financial figures
reaching thought-provoking and reaching thought- reaching thought- and reaching thought-
conclusions. provoking conclusions. . provoking conclusions. provoking conclusions. .

Total /30