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									Colorado Mountain College                                                                            Chapter 13 Test

                                                Accounting II Online
                                                   Summer 2012
                                                  Chapter 13 Test

Please submit an answer sheet on which you have indicated your name, the course name, and the following
answers: 1) the letter that corresponds to the one correct answer to multiple-choice questions and 2) your clearly
labeled computations and answers to problems. You must provide your computations to receive partial credit for
incorrect answers. Note: consult the Power Point presentations or student handouts for the chapter before
completing the test; the Power Point presentation may include material that is not covered in the textbook but is
included on the chapter test. Total points possible: 50.

Multiple-Choice (27 points)

      1. A common measure of long-term solvency is
         A) the cash debt coverage ratio.
         B) the current ratio.
         C) the asset turnover ratio.
         D) inventory turnover.

      2. Which one of the following is not a characteristic generally evaluated in ratio analysis?
         A) Liquidity.
         B) Profitability.
         C) Marketability.
         D) Solvency.

      3. Sophie's Dog Supplies has income before taxes of $275,000 and an extraordinary loss of $85,000. If the
         income tax rate is 34% on all items, the income statement should show income before irregular items
         and an extraordinary loss, respectively, of
         A) $275,000 and ($85,000).
         B) $181,500 and ($28,900).
         C) $181,500 and ($56,100).
         D) $93,500 and ($28,900).

      4. Which of the following statements is true when a company changes from one acceptable accounting
         method to another?
         A) Comparability across periods is impaired.
         B) Only a footnote is required to report the change.
         C) Changes in both depreciation methods and inventory methods are reported prospectively.
         D) Management must show that the new accounting method is preferable to the old method.

      5. A balance sheet that displays all items as a percent of total assets is called a ________ balance sheet.
         A) condensed
         B) common size
         C) comparative
         D) trendy

      6. Which situation below might indicate a company has a low quality of earnings?
         A) Revenue is recognized when earned.
         B) Ordinary repair costs (revenue expenditures) are capitalized and then depreciated.
         C) The financial statements are prepared in accordance with generally accepted accounting principles.
         D) The same accounting principles are used each year.

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Colorado Mountain College                                                                           Chapter 13 Test

      7. Jennifer's Noel Shoppe had severe damage done to its Christmas inventory due to an escaped circus
         elephant rampaging through the store. The inventory loss was $80,000 before applicable taxes of
         $20,000. Jennifer's Noel Shoppe should record the loss as a(n)
         A) $80,000 loss in other expenses and losses.
         B) $80,000 extraordinary loss.
         C) $60,000 extraordinary loss.
         D) $100,000 extraordinary loss.

      8. Which of the following is often considered as the most effective test of management’s operating
         A) liquidity.
         B) solvency.
         C) profitability.
         D) marketability.

      9. Long-term creditors are usually most interested in evaluating
         A) liquidity.
         B) marketability.
         C) profitability.
         D) solvency.

    10. If an item meets one (but not both) of the criteria for an extraordinary item, it
        A) only needs to be disclosed in the footnotes of the financial statements.
        B) may be treated as sales revenue (if it is a gain) and as an operating expense (if it is a loss).
        C) is reported as an "other revenue or gain" or "other expense and loss," net of tax.
        D) is reported at its gross amount as an "other revenue or gain" or "other expense or loss."

    11. A common measure of liquidity is
        A) return on assets.
        B) receivables turnover.
        C) profit margin.
        D) debt to equity.

    12. The assets turnover ratio measures
        A) how often a company replaces its assets.
        B) how efficiently a company uses its assets to generate sales.
        C) the portion of the assets that have been financed by creditors.
        D) the overall rate of return on assets.

    13. Which of the following would be considered an “Other Comprehensive Income” item?
        A) Net income.
        B) Gain on disposal of discontinued operations.
        C) Extraordinary loss related to flood.
        D) Unrealized loss on available-for-sale securities.

    14. Horizontal analysis is also known as
        A) linear analysis.
        B) vertical analysis.
        C) trend analysis.
        D) common size analysis.

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Colorado Mountain College                                                                        Chapter 13 Test

    15. Steinkuhler, Inc. decided on January 1 to discontinue its telescope manufacturing division. On July 1, the
        division's assets with a book value of $630,000 are sold for $450,000. Ignoring income taxes, what
        amount should be reported on Steinkuhler's income statement for the current year under the caption,
        Discontinued Operations?
        A) $75,000.
        B) $105,000 loss.
        C) $180,000 loss.
        D) $255,000.

    16. Which of the following ratios may be used to measure a company's quality of earnings?
        A) Price-earnings ratio.
        B) Return on assets ratio.
        C) Current ratio.
        D) Times interest earned ratio.

    17. Ratios are most useful in identifying
        A) trends.
        B) differences.
        C) causes.
        D) relationships.

    18. When a horizontal analysis is performed and a zero or negative amount is reported in the base year,
        A) no percentage change can be computed.
        B) the percent change will be negative.
        C) the accountant has made a mistake.
        D) the percentage change will be 100% or greater.

    19. A common measure of profitability is the
        A) current ratio.
        B) current cash debt coverage ratio.
        C) return on common stockholders' equity ratio.
        D) debt to total assets.

    20. In a common size balance sheet, the 100 percent figure is
        A) total current assets.
        B) total property, plant and equipment.
        C) total liabilities.
        D) total assets.

    21. Trading on the equity (leverage) refers to the
        A) amount of working capital.
        B) amount of capital provided by owners.
        C) use of borrowed money to increase the return to owners.
        D) number of times interest is earned.

    22. A high receivables turnover ratio indicates
        A) customers are making payments quickly.
        B) a large portion of the company's sales are on credit.
        C) many customers are not paying their receivables.
        D) the company's sales have increased.

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Colorado Mountain College                                                                           Chapter 13 Test

    23. A general rule to use in assessing the average collection period is that it
        A) should not exceed 30 days.
        B) can be any length as long as the customer continues to buy merchandise.
        C) should not greatly exceed the return period.
        D) should not greatly exceed the credit term period.

    24. Comprehensive income would not include
        A) dividends declared.
        B) unrealized gains on available-for-sale securities.
        C) discontinued operations.
        D) extraordinary gains and losses.

    25. All of the following are reported on the income statement net of tax except
        A) irregular items.
        B) other comprehensive income items.
        C) income from operations.
        D) extraordinary items.

    26. Which of the following income statement figures would probably be the best indicator of a company's
        ability to sustain profitability in future periods?
        A) Other revenues and gains.
        B) Income from operations.
        C) Net income.
        D) Extraordinary items.

    27. A company with $60,000 in current assets and $40,000 in current liabilities pays a $1,000 current
        liability. As a result of this transaction, the current ratio and working capital, respectively, will (Hint:
        compute the amounts of working capital and current ratio before and after the payment of the liability
        and compare the results.)
        A) both decrease.
        B) both increase.
        C) increase and remain the same, respectively.
        D) remain the same and decrease, respectively.

    28. (5 points) Alston Company has income before irregular items of $490,000 (after tax) for the year ended
        December 31, 2010. It also has the following items, which are subject to a 30% income tax rate:

         (1)   An extraordinary fire loss of $120,000 (before taxes).
         (2)   A gain of $60,000 (before taxes) on the discontinuance of a major segment.

         Prepare an income statement in proper form, beginning with income before irregular items.

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Colorado Mountain College                                                                     Chapter 13 Test

  29. (5 points) Below are the comparative financial statement data for Clark Company and Kent Company, who
      are competitors. All balance sheet data are as of December 31, 2010, and December 31, 2009.

                                             Clark Company                Kent Company
                                               2010        2009             2010        2009
                Net sales                   350,000                    1,200,000
                Cost of goods sold          180,000                      624,000
                Operating expenses           66,000                      266,000
                Interest expense              3,000                       10,000
                Income tax expense           17,000                       54,000
                Current assets              130,000    100,000           700,000     650,000
                Plant assets (net)          400,000    270,000         1,000,000     750,000
                Current liabilities          60,000     52,000           250,000     275,000
                Long-term liabilities        50,000     68,000           200,000     150,000
                Common stock                360,000    210,000           950,000     700,000
                Retained earnings            60,000     40,000           300,000     275,000


    1.   Prepare a vertical analysis of the 2010 income statement data for 1) Clark Company and 2) Kent
         Company. Compare the two companies and comment. Use Illus. 13-14 on p. 698 as your model for the
         vertical analysis of each company.

    2.   Compute (a) return on assets and (b) return on common stockholders’ equity ratios for both companies.
         Show your computations. Comment on the relative profitability of the companies.

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Colorado Mountain College                                                                      Chapter 13 Test

  30. (13 points) Selected financial data for Black & Decker and Snap-On Tools for 2007 are presented here (in

                                                      Black &            Snap-On
                                                      Decker               Tools
                                                   Income Statement Data for the Year
Net sales                                        $         6,563.2 $             2,841.2
Cost of goods sold                                         4,336.2               1,574.6
Selling and administrative expenses                        1,644.8                 964.2
Interest expense                                             102.1                  46.1
Other income                                                   17.5                 17.4
Income tax expense (benefit)                                  (20.5)                92.5
Net income (before irregular items)              $           518.1 $               181.2

                                                     Balance Sheet Data (End of Year)
Current assets                                   $         2,839.5 $              1,187.4
Property, plant, and equipment (net)                         596.2                  304.8
Other assets                                               1,975.2                1,272.9
Total assets                                               5,410.9                2,765.1
Current liabilities                                        1,880.8                  639.2
Long-term debt                                             2,071.4                  845.8
Total stockholders' equity                                 1,458.7                1,280.1
                                                 $         5,410.9 $              2,765.1

                                                      Beginning of the Year Balances
Total assets                                     $         5,247.7 $              2,654.5
Total stockholders' equity                                 1,163.6                1,076.3
Current liabilities                                        1,779.6                  682.0
Total liabilities                                          4,084.1                1,578.2

                                                               Other Data
Average receivables (net)                        $         1,129.5 $                573.1
Average inventory                                          1,104.7                  322.7
Net cash provided by operating activities                    725.9                  231.1
Capital expenditures                                         116.4                   61.9
Cash dividends                                               108.6                   64.8


    1.   For each company, compute the following ratios (show your computations):
             a. Current ratio
             b. Receivables turnover
             c. Average collection period
             d. Inventory turnover
             e. Days in inventory
             f. Profit margin
             g. Asset turnover
             h. Return on assets
             i. Return on common stockholders’ equity
             j. Debt to total assets
             k. Times interest earned

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Colorado Mountain College                                                                          Chapter 13 Test

            l. Current cash debt coverage
            m. Cash debt coverage
            n. Free cash flow
    2.   Compare the liquidity, solvency, and profitability of the two companies, referring to these ratios.

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