I. Multiple Choices

( ) 2. How are accounts receivable reported on the balance sheet?

a. At their net realizable value.

b. At the actual amount less an allowance for doubtful accounts.

c. At the actual amount plus an allowance for doubtful accounts.

d. Both (a) and (b).

( ) 3. Which of the following circumstances might indicate that management is manipulating the allowance for doubtful accounts?

a. A company lowers its credit standards and the allowance account increases.

b. A company tightens its credit standards and the allowance account decreases.

c. A company lowers its credit standards and the allowance account decreases.

d. A company tightens its credit standards and the allowance account increases.

( ) 4. Which of the following would create a deferred tax liability?

a. Using an accelerated method of depreciation for tax purposes and the straight-line method for reporting purposes in the early years of the life of the asset.

b. The receipt of municipal bond revenue.

c. The recognition of expenses for postretirement benefits when earned by the employees.

d. Both (a) and (c).

( ) 5. Which statement best describes the retained earnings account?

a. The retained earnings account is equal to the cash account less dividends paid.

b. Retained earnings are funds a company has chosen to reinvest in the operations of a business rather than pay out to stockholders in dividends.

c. Retained earnings represent unused cash of the firm.

d. Retained earnings is the measurement of all distributed earnings.

( ) 8. Of what value is the calculation of gross profit margin?

a. The gross profit margin helps the analyst assess the capital structure of the firm.

b. The gross profit margin allows the analyst to determine if the firm has been affected by inflation.

c. The gross profit margin indicates the profitability of a firm after considering all operating expenses.

d. The gross profit margin is the first step of profit measurement indicating how much profit the firm generates after deducting cost of goods sold.

( ) 10. The following items would be classified as financing activities on the statement of cash flows:

a. Payments for inventory, payments to lenders, payments for taxes.

b. Loans to others, returns from loans to others, acquisition of land.

c. Proceeds from borrowing, payment of dividends, repayment of debt.

d. Sales of goods, repayment of debt, loans to others.

Use the indirect method to answer questions 11-24. The following information is available for Casey Company:

Net income $200 Increase in plant and equip. $ 90

Depreciation expense 50 Payment of dividends 25

Increase in accts. receiv. 30 Increase in long-term debt 100

Decrease in inventories 10 Decrease in accounts payable 20

( ) 11. What is cash flow from operating activities for Casey Company?

a. $195 b. $310 c. $210 d. $290

( ) 12. What is cash from investing activities for Casey Company?

a. ($215) b. $215 c. ($90) d. $90

( ) 13. What is cash from financing activities for Casey Company?

a. $75 b. $125 c. ($125) d. $55

( ) 14. What is the change in cash for Casey Company?

a. $85 b. $375 c. $125 d. $195

( ) 15. If a firm is using financial leverage successfully what would be the impact of doubling operating earnings?

a. The return on equity will double.

b. The return on equity will increase, but not double.

c. The return on equity will more than double.

d. The return on equity will decline by half.

( ) 16. What relationship exists between the average collection period and accounts receivable turnover?

a. There is a direct and proportional relationship.

b. As average collection period increases (decreases) the accounts receivable turnover decreases (increases).

c. Both ratios are expressed in number of days.

d. Both ratios are expressed in number of times receivables are collected per year.

( ) 18. Which of the following tools and techniques are the most useful to the financial statement analyst?

a. Public relations material and pro forma statements prepared by the firm.

b. Common size financial statements and financial ratios.

c. The letter to the shareholders and a map.

d. None of the above.

( ) 19. Why is it important to calculate cash flow ratios?

a. Firms need cash to service debt, dividends and expenses.

b. Companies that generate healthy profit may be unable to convert profits into cash.

c. Cash flow ratios help the analyst assess the long-term profitability of a firm.

d. Both (a) and (b).

Use the following data to answer questions 20-24.

Happy Valley Co.

Selected Financial Data

December 31, 20X9

Net sales $200,000

Cost of goods sold 90,000

Operating expenses 80,000

Net income 10,000

Total assets 180,000

Total liabilities 120,000

Cash flow from operating activities 5,000

( ) 20. Happy Valley's debt ratio is:

a. 8% b. 60% c. 67% d. 150%

( ) 21. Happy Valley's cash flow margin is:

a. 2.5% b. 2.8% c, 6.3% d. 50.0%

( ) 22. Happy Valley's operating profit margin is:

a. 5% b. 15% c. 40% d. 55%

( ) 23. Happy Valley's return on equity is:

a. 5% b. 8% c. 17% d. 33%

( ) 24. Happy Valley's net profit margin is:

a. 2.5% b. 5.5% c. 2.7% d. 5.0%

II. Short Answer Questions

2. Explain why shareholder returns are magnified when financial leverage is used and operating earnings rise or fall.

3. Explain how the Du Pont System can help the analyst.

III. Calculation & Analysis Questions

Analyze the statement of cash flows for Candy Corporation.

Candy Corporation

Statement of Cash Flows

For the Years Ended December 31, 20X9 and 20X8

20X9 20X8

Cash flows from operating activities:

Net income $1200 ($1500)

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Depreciation 550 660

Changes in assets and liabilities:

Accounts receivable (1500) 2100