Acc 311 Exam II Complete Solution

Question: #1840

Financial Statement Analysis

Exam II, Spring 2015

INSTRUCTIONS: PLEASE ANSWER ALL QUESTIONS AND ATTACH YOUR SHEET OF NOTES TO THE EXAM. 100 Points Total.

Part I. Please indicate if the answer is True or False for the following questions (10 Points):

1. Liquidity ratios measure the extent of a firm’s financing with debt relative to equity. F

2. Using comparative statistical ratios to help determine a company's relative position within its industry is misleading due to the many accounting choices and techniques firms choose to report information. F

3. An increasing average collection period (Number of days increases) implies the firm has tightened its credit policies. F

4. Temporary shortfalls of cash can be satisfied by borrowing or other means, such as selling long-lived assets, but ultimately a company must generate cash from operations. T

5. Gains and losses from asset sales are considered an operating activity. F

Part II. Please circle the correct answer for the Multiple Choice Questions 7-9 (8 Points).

6. Which of the following is not true with regard to the preparation of a cash flow statement?

a. Cash flows are categorized by operating, investing, and financing activities.

b. The changes in all income statement accounts are calculated and then listed as cash inflows or outflows.

c. The direct method or the indirect method may be used to prepare the statement of cash flows.

d. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash.

7. Which of the following items are included in the adjustments to net income to obtain cash flow from operating activities?

a. Payment of dividends and depreciation expense.

b. The change in accounts receivable and the acquisition of land.

c. The gain from an asset sale and the payment of dividends.

d. The change in inventory and depreciation expense.

8. Which of the following could be indicative of cash flow problems or a result of an expansion?

a. Increasing accounts receivable and decreasing inventories.

b. Increasing accounts receivable and increasing inventories.

c. Decreasing accounts receivable and increasing inventories.

d. Decreasing accounts receivable and decreasing inventories.

9. The following items would be classified as investing activities on the statement of cash flows:

a. Proceeds from borrowing, payment of dividends, receipt of dividends.

b. Sale of goods, receipt of dividends, repurchase of firm's own stock.

c. Sale of property, purchase of equity securities, loans to others.

d. Payment to lenders, proceeds from issuing common stock, revenue.

Part III. Use the indirect method to answer questions 10-11. The following information is available for Cantor Company (10 points):

Cantor Co.

Balance Sheet

December 31, 2011 and 2010

2011 2010

Cash $220 $110

A/R 45 60

Inventory 110 90

Total current assets $375 $260

Property, plant & equipment 140 140

Less: Accumulated depreciation 40 25

Property, plant & equipment, net $100 $115

Total assets $475 $375

A/P $ 40 $ 30

Accrued expenses 10 15

Total current liabilities $ 50 $ 45

Stockholders' equity:

Common stock 200 200

Retained earnings 225 130

Total liabilities and stockholders' equity $475 $375

Cantor Co.

Income Statement

For the Year Ended December 31, 2011

Sales $600

COGS 240

Gross profit $360

Operating and other expenses 265

Net income $ 95

10. Compute cash flow from operating activities.

Net income $ 95

Adjustments:

Depreciation 15

Changes in assets/liabilities:

A/R 15

Inventory (20)

A/P 10

Accrued expenses ( 5)

Cash flow from operating activities $ 110

11. Compute cash flow from financing activities.

Cash received from customers (600 + 15) $615

Cash paid to suppliers for inventory (240 + 20 - 10) (250)

Cash paid for operating expenses (265 - 15 + 5) (255)

Cash flow from operating activities $110

12. What type of ratios measure the liquidity of specific assets and the efficiency of managing those assets? (2 pts)

a. Activity ratios.

b. Liquidity ratios.

c. Leverage ratios.

d. Profitability ratios.

13. Using the following list of items, classify each item in the table given below as inflow or outflow and whether it is operating, investing and financing (13 points):

a. Proceeds from borrowing

b. Payments for purchase of inventory

c. Revenues from sales of long-lived assets

d. Payment of dividends

e. Revenue from sales of goods

f. Repayments of debt principal

g. Acquisitions of long-lived assets

h. Payments to lenders (interest)

i. Proceeds from issuing the firm's own equity securities

j. Revenue from services

k. Payments for operating expenses

l. Repurchase of firms own shares

m. Payments for taxes

Operating Activities
Inflows	Outflows
e. Revenue from sales of goods	b. Payments for purchase of inventory
g. Returns of equity securities (dividends)	j. Payments to lenders (interest)
l. Revenue from services	m. Payments for operating expenses
	o. Payments for taxes
Investing Activities
Inflows	Outflows
c. Revenues from sales of long-lived assets	h. Loans (principal) to others
p. Revenue from sales of debt and equity securities of other entities	i. Acquisitions of long-lived assets


Financing Activities
Inflows	Outflows
a. Proceeds from borrowing	d. Payment of dividends
k. Proceeds from issuing the firm's own equity securities	f. Repayments of debt principal
	n. Repurchase of firms own shares

Use the following selected financial data for Crazy A Corporation to answer questions 15-22.

(24 Points)

Use the following selected financial information for Cascabel Corporation to answer questions

Cascabel Corporation

Balance Sheet

December 31, 2012

Assets Liabilities and stockholders' equity

Current assets Current liabilities

Cash 2 Accounts payable 36

Short-term investments 10 Accrued liabilities 25

Accounts receivable 52 Total current liabilities 61

Inventory 57 Deferred income taxes 20

Other current assets 8 Long-term debt 82

Total current assets 129 Total liabilities 163

Long-term assets Stockholders' equity

Net PPE 65 Common stock and PIC 110

Goodwill 130 Retained earnings 51

Total stockholders' equity 161

Total assets 324 Total liabilities and equity 324

Cascabel Corporation

Income Statement

For the Year Ended December 31, 2012

Net sales $345

Cost of goods sold 248

Gross profit $ 97

Operating expenses 74

Operating profit $ 23

Interest expense 8

Earnings before taxes $ 15

Income tax expense 4

Net profit $ 11

Cascabel Corporation

Statement of Cash Flow Information

For the Year Ended December 31, 2012

Cash from operating activities $20

Investing activities:

Capital expenditures $25

Acquisitions $ 9

Financing activities:

Proceeds from long-term borrowing $12

Payments on long-term borrowing $31

Payments of cash dividends $ 6

Cash paid for interest $ 9

Cash paid for income taxes $ 5

14. Cascabel’s current ratio is:

a. .47

b. 2.11

c. 1.18

d. 1.79

15. Cascabel's cash flow liquidity ratio is:

a. .52

b. .36

c. 1.91

d. .33

16. Cascabel's cash conversion cycle is:

a. 82 days

b. 24 days

c. 192 days

d. 86 days

17. Cascabel's fixed asset turnover ratio is:

a. 5.31

b. .19

c. 5.91

d. .17

18. Cascabel's cash interest coverage ratio is:

a. 2.50

b. 3.50

c. 3.78

d. 4.50

19. Cascabel's cash flow adequacy ratio is:

a. 3.10

b. .32

c. .28

d. .21

20. Cascabel's operating profit margin is:

a. 5.80%

b. 4.35%

c. 3.19%

d. 6.67%

21. Cascabel's cash flow margin is:

a. 1.81%

b. .58%

c. 5.80%

d. 3.48%

22. What is the cash conversion or net trade cycle (3 pts)?

a. The amount of time needed to complete the normal operating cycle of a firm.

b. The amount of time it takes to manufacture or buy inventory.

c. The amount of time it takes to sell inventory.

d. The amount of time it takes to be profitable.

23. Below is a Statement of cash Flows for Kat Kompany. Using the information explain the company what is the company’s cash flow situation from 2010 through 2012, with specific reference to the three sections of the Cash Flow Statement (15 Points).

Kat Kompany

Statement of Cash Flows

For the Years Ended December 31, 2012, 2011, and 2010

                                                                  2012             2011                2010
Net income (loss)                                                        ($145)              $190                $206
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation                                                      265                  275                 171

Deferred income taxes (70) (40) 20

Loss on sale of business assets 45 0 0

Changes in assets and liabilities:
            Accounts receivable                                           395                  (10)               (125)
            Inventory                                                             70                  (45)               (145)
            Other current assets                                           (85)                  (25)        &nbs

Solution: #1826

Acc 311 Exam II Complete Solution

From a liquidity perspective, the company’s liquidity has increased in 2012. The Current ratio is a good indicator of liquidity of the company. An increase in current ratio from 5.19 to 7.47 implies that the current assets as compared to current liabilities have increased in 2012. The Quick ratio is a similar indicator except that it considers quick assets like cash and bank balance which are available to the company. In the case of Maggie’s Crafts, the Quick ratio has...