Accounting 102A: Midterm #4

1. Which of the following is a cash outflow connected to investing activities? A) Repurchase of treasury stock. B) Purchase of short-term investments. C) Purchase of property, plant and equipment. D) Both B and C are outflows connected to investing activities E) All of the above are cash outflows connected to investing activities.

2. The statement of cash flows (indirect method) reports depreciation expense as an addition to net income because depreciation. A) causes an inflow of funds for the replacement of assets. B) reduces reported net income of the period but does not involve an outflow of cash for that period. C) is a direct use of cash. D) reduces reported net income and causes an inflow of cash. E) None of the above is correct.

3. Which of the following statements about cash flows from operating activities, in a statement of cash flows prepared under the indirect method, is correct? A) An increase in accounts receivable would be subtracted from net income. B) An increase in salaries payable would be subtracted from net income. C) An increase in inventory would be added to net income. D) Depreciation expense would be subtracted from net income. E) None of the above is correct.

4. In 2000, Boston Beer reported a quality of income ratio of 1.54 while Coors reported a ratio of 2.60 in 2000. Which of the following statements is true? A) Coors 2.60 ratio is higher than Boston Beer's ratio which means they are generating a higher quality of income. B) The ratio for both companies shows a good quality of income because they are both over one. C) Boston Beer's ratio means that for every dollar of net income, they were able to generate cash inflow from operations of $1.54. D) Both A and C are true. E) All of the above are true.

5. Which of the following would not be a cash flow from financing activities? A) Issuance of common stock. B) Borrowing on a long-term note payable.

C) Collection of a cash dividend.

6. During 20B, Bogus Corporation reported net income of $10,000. During the year, depreciation expense was $5,000, accounts payable increased $2,000 and accounts receivable increased $4,000. Therefore, based upon this information, the “cash inflow from operating activities” was A) $21,000. B) $20,000. C) $16,000. D) $13,000. E) None of the above is correct.

7. Which of the following statements about the capital acquisitions ratio is true? A) A high ratio indicates less need for outside financing of property, plant and equipment. B) The ratio is computed by dividing cash flow from operations by the average property, plant and equipment, net from the balance sheet. C) A low ratio may indicate a failure to update property, plant and equipment which can limit a company's ability to compete in the future. D) Both A and C are true. E) All the above are true.

8. A cash inflow from operating activities includes A) collection of the principal of a loan. B) receipt of interest on an investment. C) proceeds from issuance of notes payable. D) collection of sales price of equipment used in operations of the business. E) None of the above is correct.

9. Travis Company reported net income for 20B of $20,000, depreciation expense of $6,000, and amortization expense (patent) of $5,000. Also, accounts payable increased by $7,000 and inventory decreased by $2,000. The amount of “cash flows from operating activities” for 20B was A) $34,000. B) $35,000. C) $36,000. D) $40,000. E) None of the above is correct.

10. For an investment to qualify as a cash equivalent, it must be readily convertible to a

known amount of cash and A) it must be identified as a cash equivalent on the income statement. B) must be sufficiently close to its maturity date so that its market value is relatively insensitive to interest rate changes. C) the investment must have a known foreign exchange rate. D) it must mature within 4 months. E) None of the above is correct.

11. Which of the following is true? A) Repayments of principal and interest reduce financing cash flows. B) Repurchase of treasury shares is a cash outflow connected to investing activities. C) If we borrow $450 million in long-term notes and repay $380 million of long-term notes, then these items must both be disclosed and not netted against each other in the financing section. D) Both A and C are true. E) All of the above are true.

12. Allen Company reported total sales revenue of $150,000 and total expenses of $152,000 (i.e., a net loss of $2,000) for the year ended December 31, 20D. During 20D, accounts receivable decreased by $1,000, trade payables increased by $5,000, wages payable increased by $3,000, and $18,000 in depreciation expense was recorded. Assuming no other adjustments are needed, the “net cash flow from operating activities for 20D was (parentheses indicate net cash outflow) A) $29,000 B) $25,000 C) $23,000 D) ($1,000) E) None of the above is correct.

13. Jackson Company gathered the following data to prepare its 20B statement of cash flows: Based only on the above data, the net cash inflow from operating activities during 20B was A) $43,000. B) $51,000. C) $53,000. D) $45,000. E) None of the above is correct. 14. BC Company reported total sales revenue of $80,000 and total expenses of $72,000 (i.e., net income $8,000) for the year ended December 31, 20X. During 20X, accounts receivable increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased by $1,000, and $5,000 in depreciation expense was recorded. Assuming no other adjustments to net income are needed, the net cash inflow from

operating activities was A) $10,000. B) $11,000. C) $13,000. D) $19,000. E) None of the above is correct. 15. To prepare a statement of cash flows (indirect method), which of the following items should be added back to net income to derive “cash flow from operating activities?” A) Depreciation expense. B) Increase in accounts receivable. C) Loss on a sale of equipment. D) Two of the above are correct. E) None of the above is correct. 16. Use the following to answer questions 16-18: The following selected information is taken from the Toys “R” Us financial statements for the years 1999 to 2001 in millions of dollars:Toys “R” Us' quality of income ratio for 2001 and 2000 respectively equals A) .68 and 2.09. B) -.76 and .62. C) -2.68 and .32. D) -.37 and 3.10. 17. Toys “R” Us' total asset turnover ratio for 2001 and 2000 respectively equals A) 1.39 and 1.46 B) 2.60 and 2.73 C) 1.42 and 1.42 D) 2.66 and 2.66 18. Toys “R” Us' profit margin ratio for 2001 and 2000 respectively equals A) 5.6% and 3.7% B) 3.8% and 4.4% C) 3.6% and 2.4% D) 31.0% and 29.9% 19. Use the following to answer questions 19-20:The following information was taken from the financial statements of Coca-Cola for the years 2001 and 2000: Calculate Coca-Cola's fixed asset turnover ratio for 2001. A) 4.51 B) 3.06 C) .93 D) 4.66 20. Calculate Coca-Cola's return on equity (ROE) for 2001. A) 35.0%

B) 41.3% C) 38.5% D) 40.4% 21. Strait Company has outstanding shares as follows: common stock, no par, 16,000 shares and preferred stock, par $10, 5,000 shares. The number of shares that should be used in the denominator to compute earnings per share should be A) 5,000. B) 16,000. C) 18,000. D) 21,000. E) 50,000. 22. Outback Steakhouse's earnings per share for 2001 was $1.63, in 2002, it was $1.96 and in 2003, it was $2.26. Which of the following statements is false? A) Investors in Outback would be pleased by the improved earnings per share. B) Earnings per share increased about 39% from 2001 to 2003. C) In 2003, a competitor, Ruby Tuesday's earnings per share was $1.68 making Outback a more attractive investment. D) All of the above are false. E) None of the above is false 23. Which of the following statements about earnings per share is true? A) Increased net income would cause earnings per share to increase. B) Issuance of more common shares would cause earnings per share to increase. C) Purchase of treasury shares would cause earnings per share to increase. D) Both A and C are true. 24. The balance sheet of Werther Company showed the following data about its common stock, par $1: authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares 4,700,000. Therefore, the number of treasury stock shares was A) 0. B) 4,700,000. C) 4,300,000. D) 400,000. E) None of the above is correct. 25. If Hayes Corporation sells and issues 100 shares of its $1 par value common stock at $15 per share, the entry to record the sale will not include a A) Debit to cash of $1,500. B) Credit to contributed capital in excess of par of $1,400. C) Credit to common stock of $100. D) Credit to retained earnings of $1,500. E) All of the above would be included. 26. Which of the following statements is true?

A) When cost of goods sold as a percentage of sales increases the gross margin percentage will increase. B) It is possible for cost of goods sold in dollars to increase while cost of goods sold as a percentage of sales decreases. C) If gross margin percentage is the same for the current and past year, then sales and cost of goods sold in dollars did not change. D) Both B and C are true. E) All of the above are true. 27. If a company's return on equity (ROE) ratio increases from one year to the next, the most likely cause is A) an increase in net income. B) a reduction in total expenses as a percentage of sales. C) an increase in stockholders' equity. D) Both A and B are most likely causes. E) All of the above are most likely causes. 28. In 2001, Home Depot's cost of goods sold percentage was 70.1% and its selling and store operating costs was 18.6% of sales. In 2000, their cost of goods sold percentage was 70.3% while its selling and store operating costs was 17.7% of sales. What effect would the change in these percentages have on 2001's gross margin percentage and profit margin percentage? A) Cost of goods sold would increase gross margin and profit margin percentages but selling and store operating costs would decrease gross margin and profit margin percentages. B) Cost of goods sold would decrease gross margin and profit margin percentages but selling and store operating costs would increase gross margin and profit margin percentages. C) Cost of goods sold would increase gross margin and profit margin percentages but selling and store operating costs would decrease the profit margin percentage. D) Cost of goods sold would decrease gross margin and profit margin percentages but selling and store operating costs would increase profit margin percentage. E) None of the above. 29. Which of the following is true? A) The major difference between the quick and current ratios is inventory. B) Current liabilities are the denominator in the quick and current ratios. C) Companies that sell expensive merchandise tend to have high inventory turnover ratios. D) Both A and B are true. E) All of the above are false. 30. Which of the following is false? A) An increase in the selling and administrative expenses as a percentage of sales will cause a decrease in the profit margin percentage. B) Earnings per share will increase when treasury shares are repurchased.

C) The fixed asset turnover ratio will decrease when working capital assets increase. D) All of the above are false. E) None of the above is false