optiix

Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the time, the book value of Slayton shares exceeded their market value. The shares are expected to be reissued in the future when the market price of Slayton’s stock increases. Do Slayton’s repurchased shares continue to have voting rights and to pay cash dividends?

Voting rights

Cash dividends paid

A) Yes No

B) No No

C) No Yes

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Repurchased stock that is not cancelled is called treasury stock. Treasury stock does not have voting rights and does not receive cash dividends.

optiix

Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following:

• 
  Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008.
• 
  Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio?

Compensation expense

Current ratio

A) $98.5 million Decrease

B) $94.5 million Decrease

C) $98.5 million No effect

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Because of the matching principle, compensation expense should be increased by the (accrued) salary expense for the last week of 2007 and the liability for the bonuses was incurred in 2007. Thus, total compensation expense for 2007 is $98.5 million ($90 million unadjusted compensation expense + $3.5 million salary accrual + $5 million bonus accrual). Since the salaries and bonuses were not paid in 2007, accrued liabilities would increase by $8.5 million. An increase in accrued liabilities, a current liability, would decrease the current ratio.

optiix

On January 1, 2008, Tenant Company leased office space from Landlord Inc. for 5 years at $75,000 per month. On that same date, Tenant made the following payments to Landlord:

First month’s rent	$75,000
Last month’s rent	75,000
Security deposit	100,000
Lease improvements	1,500,000

The leasehold improvements include build-out costs to install office walls, restrooms, and a kitchen. Tenant allocates the cost of the leasehold improvements over the lease term using the straight-line method. What amount of total lease expense should Tenant report for the year ended 2008 and what is the balance of all of the lease related assets on December 31, 2008, assuming the lease payments are made on the first day of each month?

Lease expense

Lease related assets

A) $1,200,000 $1,375,000

B) $1,200,000 $1,200,000

C) $375,000 $1,375,000

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Total annual lease expense is $1,200,000 [$75,000 monthly payment × 12 months) + ($1,500,000 lease improvements / 5 years)]. At the end of 2008, Tenant will report lease related assets of $1,375,000 [$75,000 prepaid rent + 100,000 deposit + $1,200,000 book value of leasehold improvements].

optiix

The statement of changes in equity is least likely to provide information on the firm’s:

A) payment of dividends.

B) repayment of bond principal.

C) comprehensive income.

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The statement of changes in equity shows a firm’s comprehensive income (net income and other comprehensive income) and transactions with shareholders, such as dividends paid and issuance or repurchases of stock. Repayment of bond principal is not a change in equity: assets (cash) decrease and liabilities (long-term debt) decrease.

ikoreaii

Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to eliminate insect infestation. Customers are required to prepay for the service at the beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost of performing the service, what is the most likely effect on the firm’s liabilities and equity compared to the correct treatment?

Liabilities

Equity

A) Overstated Overstated

B) Overstated Understated

C) Understated Overstated

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When payment is received, the firm has an obligation to provide the service. This obligation is reported as a liability ‘unearned revenue’ as a liability, offsetting the increase in cash. If they book the revenue and estimated expenses of providing the service this will overstate equity (assuming revenue greater than expected expense) and liabilities will be understated.

ikoreaii

A key limitation of balance sheets in financial analysis is that:

A) different balance sheet items may be measured differently.

B) liquidity and solvency ratios require information from other financial statements.

C) some items are recognized when they are unlikely to reflect a flow of economic benefits.

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Balance sheet values may use a mixture of measurement bases (historical cost, fair value, etc.). As a result, balance sheet values of assets, liabilities, and equity may not reflect their intrinsic values. Balance sheets provide the information necessary to calculate the firm’s solvency and liquidity ratios. Items are recognized on the balance sheet only if a flow of future economic benefits to or from the firm is probable.

ikoreaii

Common size balance sheets express all balance sheet items as a percentage of:

A) sales.

B) equity.

C) assets.

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Common size balance sheets express all balance sheet items as a percentage of assets. Note that common size income statements express all income statement items as a percentage of sales.

ikoreaii

The following data is from Delta's common size financial statement:

Earnings after taxes	18%
Equity	40%
Current assets	60%
Current liabilities	30%
Sales	$300
Total assets	$1,400

What is Delta's total-liabilities-to-equity ratio?

A) 1.5.

B) 1.0.

C) 2.0.

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If equity = 40% of assets, total liabilities = 60% of assets, thus 60 / 40 = 1.5.

ikoreaii

An analyst has gathered the following information about a company:

Balance Sheet
Assets
	Cash	100
	Accounts Receivable	750
	Marketable Securities	300
	Inventory	850
	Property, Plant & Equip	900
	Accumulated Depreciation	(150)
Total Assets		2750
Liabilities and Equity
	Accounts Payable	300
	Short-Term Debt	130
	Long-Term Debt	700
	Common Stock	1000
	Retained Earnings	620
Total Liab. and Stockholder's equity		2750
Income Statement
Sales		1500
COGS		1100
Gross Profit		400
SG&A		150
Operating Profit		250
Interest Expense		25
Taxes		75
Net Income		150

What is the quick ratio?

A) 1.53.

B) 2.67.

C) 0.62.

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Quick ratio = [100(cash) + 750(AR) + 300(marketable securities)] / [300(AP) + 130(short-term debt)] = (1,150 / 430) = 2.67

ikoreaii

Given the following income statement and balance sheet for a company:

Balance Sheet
Assets	Year 2003	Year 2004
Cash	500	450
Accounts Receivable	600	660
Inventory	500	550
Total CA	1600	1660
Plant, prop. equip	1000	1250
Total Assets	2600	2910
Liabilities
Accounts Payable	500	550
Long term debt	700	1002
Total liabilities	1200	1552
Equity
Common Stock	400	538
Retained Earnings	1000	820
Total Liabilities & Equity	2600	2910
Income Statement
Sales		3000
Cost of Goods Sold		(1000)
Gross Profit		2000
SG&A		(500)
Interest Expense		(151)
EBT		1349
Taxes (30%)		(405)
Net Income		944

What is the current ratio for 2004?

A) 3.018.

B) 0.331.

C) 2.018.

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Current ratio = (CA / CL) = (1,660 / 550) = 3.018