09.30 Flashcards
During 20x8, a firm discontinued a component qualifying for separate disclosure within the income statement. The disposal was completed before the end of 20x8 and resulted in a $300 disposal gain. The component earned $400 in 20x7 but lost $100 (negative income) in 20x8. The 20x7 income statement reported income from continuing operations (IFCO) of $6,000. The 20x8 income statement reported $7,000 of net income. Determine the following two amounts:
- IFCO for 20x7 as it is reported comparatively in the 20x8 statements
- IFCO for 20x8
- IFCO for 20x7 as it is reported comparatively in the 20x8 statements-$5,600
- IFCO for 20x8-$6,800
**The discontinued operations section of the income statement for prior periods shown comparatively separates the operating income of discontinued components from IFCO even though the decision had not yet been made in those earlier periods. This reporting results in improved comparability because each year reports IFCO on the same basis. (1) IFCO for 20x7, as it is reported comparatively in the 20x8 statements, reflects the removal of the $400 operating income for the segment and thus equals $6,000 − $400, or $5,600. (2) IFCO for 20x8 is computed by removing the effect of the disposal gain and operating loss from income. IFCO for 20x8 equals $7,000 net income − $300 disposal gain + $100 operating loss, or $6,800.
On April 30, 20X5, Carty Corp. approved a plan to dispose of a segment of its business. The disposal loss is $480,000, including severance pay of $55,000 and employee relocation costs of $25,000, both of which are directly associated with the decision to dispose of the segment. The firm is a calendar-fiscal year firm, and the segment’s operating loss for the entire year (20X5) through the date of disposal was $120,000.
Before income taxes, what amount should be reported in Carty’s income statement for the year ended December 31, 20X5, as the total income effect (loss) from discontinued operations?
$600,000
$480,000
$120,000
$360,000
$600,000
**The $600,000 total loss from discontinued operations is the sum of the operating loss ($120,000) and the loss on disposal ($480,000). The two amounts, $120,000 and $480,000, are disclosed separately but together comprise the total loss on the discontinued operation.
On May 15, Year 1, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, Year 2, at a selling price of $500,000. The segment reported $195,000 in operating losses for Year 1. The segment is expected to lose $30,000 from operations in Year 2. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its Year 1 income statement? $575,000 $225,000 $195,000 $545,000
$545,000
**There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for Year 1.
On December 30, 2004, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1.
On December 31, 2004, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
Current ratio
Quick ratio
Current ratio-iNCREASED
Quick ratio-DECREASED
**Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased.
The current ratio was greater than 1.0 before the transaction. Therefore, the denominator decreased a greater percentage than the numerator causing the ratio to increase.
The quick ratio was less than 1.0 before the transaction. Therefore, the numerator decreased a greater percentage than the denominator causing the ratio to decrease.
Selected data pertaining to Lore Co. for the calendar year 2005 is as follows:
Net cash sales $ 3,000
Cost of goods sold 18,000
Inventory at beginning of year 6,000
Purchases 24,000
Accounts receivable at the beginning of the year 20,000
Accounts receivable at the end of the year 22,000
The accounts receivable turnover for 2005 was 5.0 times. What were Lore’s 2005 net credit sales?
$105,000
$107,000
$110,000
$210,000
$105,000
**The net cash sales are not involved in the accounts receivable turnover ratio, nor are inventory or purchases. Working backwards from accounts receivable, net credit sales is found as:
Accounts receivable turnover = net credit sales/average accounts receivable.
5 = net credit sales/[($20,000 + $22,000)/2]
5($21,000) = net credit sales = $105,000
The following computations were made from Clay Co.’s 2005 books:
Number of days’ sales in inventory 61
Number of days’ sales in trade accounts receivable 33
What was the number of days in Clay’s 2005 operating cycle?
33
47
61
94
94
*The operating cycle is the total period of time from the purchase of inventory, to sale, and then finally to the collection of cash from receivables.
The operating cycle thus can be approximated by the sum of the number of days’ sales in inventory, which is the average number of days before an item of inventory is sold, plus the number of days’ sales in receivables, which is the average number of days to collect a receivable. This sum is 94 (61 + 33) days.
Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was Stent’s debt-to-equity ratio?
- 63
- 08
- 52
- 48
1.08
**First, we must compute the amount of debt. Since Assets = Liabilities + Stockholders’ Equity, we have 760,000 = ? + (150,000 + 215,000). Thus, debt = $395,000. Debt to Equity is 395,000/(150,000 + 215,000) = 1.08
Are the following ratios useful in assessing the liquidity position of a company?
Defensive-interval ratio
Return on stockholders’ equity
Defensive-interval ratio-YES
Return on stockholders’ equity-NO
**The defensive interval ratio is the ratio of quick assets to daily operating expenditures. Quick assets are current assets that are very readily converted to cash. They include cash, accounts receivable, and certain investments. The ratio indicates the length of time in days that the firm can operate with its present liquid resources. Thus, the measure is a liquidity measure.
The return on stockholders’ equity is the ratio of income to average owners’ equity. This ratio is a profitability ratio, not a liquidity ratio. A firm could have a strong return on equity ratio and not be particularly liquid.
The following financial ratios and calculations were based on information from Kohl Co.’s financial statements for the current year.
Accounts receivable turnover-
Ten times during the year
Total assets turnover-
Two times during the year
Average receivables during the year-
$200,000
What were Kohl's average total assets for the year? $2,000,000 $1,000,000 $400,000 $200,000
$1,000,000
**From the given information, (asset turnover) = 2 = sales/(average total assets). (AR turnover) = 10 = sales/(average AR). Therefore, (average total assets) are 5 times (average AR). (average total assets) = 5(average AR) = 5($200,000) = $1,000,000.
The following data pertain to Cowl, Inc., for the year ended December 31, 2004:
Net sales $ 600,000
Net income 150,000
Total assets, January 1, 2004 2,000,000
Total assets, December 31, 2004 3,000,000
What was Cowl’s rate of return on assets for 2004?
5%
6%
20%
24%
6%
**Rate of return on assets is the ratio of net income for a period to average total assets for the same period.
$150,000/[($2,000,000 + $3,000,000)/2] = 6%.
Lew Co. sold 200,000 corrugated boxes for $2 each. Lew’s cost was $1 per unit.
The sales agreement gave the customer the right to return up to 60% of the boxes within the first six months, provided an appropriate reason was given.
It was immediately determined, with appropriate reason, that 5% of the boxes would be returned. Lew absorbed an additional $10,000 to process the returns and expects to resell the boxes.
What amount should Lew report as operating profit from this transaction?
$170,000
$179,500
$180,000
$200,000
$180,000
**Lew’s operating profit is computed and explained as follows:
Sales 200,000 units × $2 selling price = $400,000
Less: Provision for returns 200,000 × .05 × $2 = 20,000[1]
Net Sales = $380,000
COGS 200,000 units × $1 cost = $200,000
Less: Provision for returns 10,000 × $1 = 10,000
Net COGS 190,000 units × $1 = 190,000
Gross Profit $190,000
Less: Return processing cost 10,000[2]
Operating profit $180,000
[1] The facts state that 5% of the (all) boxes sold would be returned. The fact that 60% could be returned only established the maximum returnable rate, whereas 5% is the expected return rate.
[2] Since Lew has “absorbed” $10,000 to process returns, it has charged that amount to sales. The fact that Lew expects to resell the boxes is not recognized until the boxes are actually resold.
The following items were among those reported on Lee Co.’s Income Statement for the year ended December 31, 20x5:
Legal and audit fees $170,000 Rent for office space 240,000 Interest on inventory floor plan 210,000 Loss on abandoned data processing equipment used in operations 35,000 The office space is used equally by Lee's sales and accounting departments. What amount of the above-listed items should be classified as general and administrative expenses in Lee's multiple-step Income Statement? $290,000 $325,000 $410,000 $500,000
$290,000
**General and administrative expenses include expenses that are not related to significant specifically identifiable activities. G & A costs benefit the entire firm rather than one specific function.
The $170,000 of legal and audit fees are included in G & A expenses and are 1/2 of the rent for the office space ($120,000 = .5 × $240,000). The portion of rent related to accounting is G & A. The other half of the rent is a selling expense, a significant separate activity. The interest and loss are also separately reported. Thus total G & A expense is $290,000 ($170,000 + $120,000).
Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?
- Accrued and disclosed.
- Accrued but NOT disclosed.
- Disclosed but NOT accrued.
- No disclosure or accrual.
Disclosed but NOT accrued.
**Contingencies are accrued and recognized as a liability when the occurrence of the liability is probable and the amount can be reasonably estimated. This lawsuit is reasonably possible, but not probable. Reasonably possible is typically a 50/50 chance of occurrence, where probable is a higher likelihood of occurrence. This answer is correct because this lawsuit would be disclosed, but not accrued.
When preparing a draft of its 2005 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following:
Treasury stock of Mont, Inc. at cost, which approximates market value on December 31 $24,000
Idle machinery 11,200
Cash surrender value of life insurance on corporate executives 13,700
Allowance for decline in market value of noncurrent equity investments 8,400
At what amount should Mont’s net assets be reported in the December 31, 2005 balance sheet?
$851,000
$850,100
$842,600
$834,500
$851,000
**Preadjusted asset total $875,000
Less Mont stock (24,000)
Corrected total assets $851,000
A firm’s treasury stock is not an asset of that firm. A firm cannot own its own stock. The other items listed are appropriately included in assets.
Selected data pertaining to Lore Co. for the calendar year 2005 is as follows:
Net cash sales $ 3,000
Cost of goods sold 18,000
Inventory at the beginning of the year 6,000
Purchases 24,000
Accounts receivable at the beginning of the year 20,000
Accounts receivable at the end of the year 22,000
Lore would use which of the following to determine the average days’ sales in inventory?
Numerator Denominator 365 Average inventory 365 Inventory turnover Avg inv Sales div by 365 Sales div by 365 Inv TO
NUM DENOMINATOR
365 Inventory turnover
**The ratio of 365 (days) to the inventory turnover is the average days sales in inventory. The inventory turnover ratio is the cost of sales divided by average inventory; it indicates the number of times inventory is “turned over” or sold during the year.
For example, if cost of sales is $100,000, and average inventory is $20,000, then, on average, the inventory on hand is sold (or is turned over) five times during the year. Now 365/5 = 73; this means that there are 73 days’ of sales in inventory, before replenishment of stocks is necessary.
