Question : 41.Accounting numbers useful in that they a.are easy to manipulate by : 1241843

 

 

41.Accounting numbers are useful in that they

a.are easy to manipulate by management and help predict a company’s future earnings and cash flows.

b.allow users to see management’s predictions of future profits and help predict a company’s future cash flows.

c.help investors and creditors influence and monitor management’s business decisions and help predict a company’s future earnings and cash flows.

d.help investors and creditors influence, manipulate, and monitor management’s business decisions so that future profits are high.

 

 

 

42.The two fundamental ways in which financial accounting numbers are useful are

a.prediction and influence.

b.control and monitoring.

c.prediction and monitoring.

d.control and prediction.

 

 

 

43.True value of a company is determined by

a.adding adjustments for the business environment, unrecorded events, and types of shareholders to the book value of a company.

b.adding adjustments for the business environment, unrecorded events, and cumulative profits to the book value of a company.

c.adding adjustments for the business environment, management bias, and cumulative profits to the book value of a company.

d.adding adjustments for the business environment, unrecorded events, and management bias to the book value of a company.

 

 

 

44.What type of audit report do most companies receive from their auditors?

a.standard audit reports

b.no report unless the company has problems

c.a GAAP report

d.a comprehensive report

 

 

 

Use the information that follows taken from Campbell Company’s financial statements for the years ending December 31, 2015and 2014to answer problems 45 through 48.

 

Balance Sheet Information

2015

2014

Assets

 

 

 

Cash

$   25

$   50

 

Accounts receivable

60

70

 

Inventory

40

30

 

Land, building, and equipment

225

250

Total Assets

$350

$400

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

Accounts payable

$   85

$ 100

 

Long term note payable

180

200

 

Common stock

150

150

 

Retained earnings

-65

-50

Total Liabilities &Shareholders’ Equity

$350

$400

 

Income Statement Information

 

 

Sales (all sales are on credit)

$850

 

Cost of goods sold

425

 

Gross profit

$425

 

Operating expenses

440

 

Net income

$-15

 

 

45.Calculate Campbell’s current and quick ratios as of December 31, 2014 and December 31, 2015 and choose the correct answers below:

 

a.Campbell’s quick and current ratios improved from December 31,2014 to December 31, 2015.

b.Campbell’s quick and current ratios worsened from December 31,2014 to December 31, 2015.

c.Campbell’s quick ratio improved but the current ratio worsened December 31,2014 to December 31, 2015.

d.Campbell’s quick ratio worsened but the current ratio improved from December 31,2014 to December 31, 2015.

 

Solution:B

 

Campbell has the following solvency ratios on December 31:

 

2015 Current:

$125/$85 = 1.47

Quick:

$85/$85 = 1.00

2014 Current:

$150/$100 = 1.50

Quick:

$120/$100 = 1.20

 

The current ratio declined from 1.50 to 1.47 and the quick ratio declined from 1.20 to 1.00.

 

 

 

46.Calculate Campbell’s inventory turnover ratio and accounts receivable turnover ratio for the year ended 2015. Further, assume that in Campbell’s industry, the industry average inventory turnover ratio is 12 and the industry average receivables turnover ratio is 14.

 

a.Campbell’sinventory turnover ratio and accounts receivable turnover ratios are better than average for Campbell’sindustry.

b.Campbell’sinventory turnover ratio and accounts receivable turnover ratios are worse than average for Campbell’sindustry.

c.Campbell’sinventory turnover ratio is better but the accounts receivable turnover ratio is worse than average for Campbell’sindustry.

d.Campbell’sinventory turnover ratio is worse and accounts receivable turnover ratio is better than average for Campbell’sindustry.

 

Solution:C

 

Campbellhas the following turnover ratios on December 31, 2015:

 

Inventory turnover:

$425 / [(40+30) / 2] = 12.14

A/R turnover

$850 / [(60+70) /2] = 13.07

 

Inventory turnover is 12.14 compared to 12 for the industry and receivables turnover is 13.07 as compared to the industry average of 14.  So, inventory turnover is better and accounts receivable turnover is worse.

 

 

 

47.Calculate Campbell’s return on equity and return on assets for the year ended December 31, 2015.  Assume that the income tax rate is 30%. Also assume that in Campbell’s industry, the industry average return on equity is 19% and the average return on assets is 11%.

 

a.Campbell’sreturn on equity and return on assets are better than average for Campbell’sindustry.

b.Campbell’sreturn on equity and return on assets are worse than average for Campbell’sindustry.

c.Campbell’sreturn on equity is better but return on assets is worse than average for Campbell’sindustry.

d.Campbell’sreturn on equity is worse but return on assets is better than average for Campbell’sindustry.

 

Solution:B

 

Because net income is negative, both of these ratios are less than zero and both ratios are worse than the industry average.

 

 

 

48.Calculate Campbell’s debt to equity ratio as of December 31, 2014 and as of December 31, 2015.  Also assume that in Campbell’s industry, the industry average debt to equity ratio is 2.75 as of December 31, 2014 and as of December 31, 2015.

 

a.Campbell’sdebt to equity ratio improved from 2014 to 2015.

b.Campbell’sdebt to equity ratio was better than average for the industry both years.

c.Campbell’sdebt to equity is worse than average for the industry for both years.

d.Both a and b above, but not c.

 

Solution:C

 

Campbellhas the following debt to equity ratios on December 31:

 

2015

($85+180) / (150-65) = 3.12

2014

($100+200) / (150-50) = 3.00

 

Unlike the other ratios we study in this course, the lower the debt to equity ratio, the better.  Hence, the ratio worsened from 2014 to 2015 and is worse than the industry average.

 

 

 

49.Devin Inc. has an inventory turnover ratio of 35. Devin’s average number of day’s inventory is:

 

a.Less than 10.

b.Between 10 and 12.

c.More than 12.

d.Unable to be determined based on this limited information.

 

Solution:B

 

365 / 35 = 10.4 days

 

 

 

50.Justin Company has total assets, liabilities, and shareholders’ equity of $38,000, $17,000, and $21,000, respectively, at the beginning of 2015. At the end of 2015, total assets, liabilities, and shareholders’ equity were reported at $32,000, $13,000, and $19,000, respectively.  What is Justin’s debt to equity ratio?

 

a. 0.70

b. 1.17

c.0.75

d. 1.13

 

Solution:

Debt/equity ratio = Average total liabilities / Average total shareholders’ equity

=  (($17,000 + $13,000)/2) / (($21,000 + $19,000)/2) = .75