Multiple Choice Answers

Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.

Larkins Company’s book value per share at the end of Year 2 was closest to:

a)76.67
b)70.00
c)10.00
d)23.33

2. An increase in the market price of a company’s common stock will immediately affect its
a)dividend payout ratio
b)dividend yield ratio
c)earnings per share common stock
d) debt to equity ratio

3. Kava Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as K65. Data concerning this product are given below:
Per Unit
Selling price $180
Direct materials $29
Direct labor $5
Variable manufacturing overhead $4
Fixed manufacturing overhead $21
Variable selling expense $2
Fixed selling and administrative expense $17

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost. (Source: CMA, adapted)
The company has received a special, one-time-only order for 500 units of component K65. There would be no variable selling expense on this special order, and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company wouldn’t be affected by the order. Assuming that Kava has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company shouldn’t go?
a)78
b)59
c)180
d)38
4.
A company’s current ratio and acid-test ratios are both greater than 1. If obsolete inventory is written off, this would

a) decrease the acid-test ratio
b) increase the acid-test ratio.
c) increase net working capital
decrease the current ratio.

5. Fonics Corporation is considering the following three competing investment proposals:
Aye Bee Cee
Initial investment required $62,000 $74,000 $95,000
Net present value $10,000 $8,000 $12,000
Internal rate of return 15% 17% 18%

Using the project profitability index, how would the above investments be ranked (highest to lowest)?
a) Bee, Cee, Aye
b) Aye, Cee, Bee
c) Cee, Bee, Aye
d) Aye, Bee, Cee
6. Products A, B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be
a) sold at the split-off point, since further processing will result in a loss of $2,500 each period
b) sold at the split-off point, since further processing would result in a loss of $0.50 per unit
c) processed further, since this will increase profits by $2,500 each period.
d) processed further, since this will increase profits by $12,500 each period

7.
Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.

Larkins Company’s dividend yield ratio on December 31, Year 2 was closest to:

a)2.1
b)4.1
c)4.6
d)5.0

8. Brittman Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:
IP NI YD
Selling price per unit $183.57 $207.74 $348.15
Variable cost per unit $144.42 $155.04 $269.50
Minutes on the constraint 2.90 3.40 5.50

Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?
a)39.15 per unit
b)13.50 per minute
c)15.50 per minute
d)78.65 per unit
9. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would be the incremental effect on the company’s overall profit of reworking and selling the material rather than selling it as is as scrap?
a)-7600
b)11,900
c)-20900
d)-1400

10. Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment:
Year Cash Inflows
1 $120,000
2 60,000
3 40,000
4 40,000
5 40,000
Total $300,000

Assuming that the cash inflows occur evenly over the year, the payback period for the investment is _______ years
a)2.50
b).75
c)1.67
d)4.91
11. Ignore income taxes in this problem.) Purvell Company has just acquired a new machine. Data on the machine follow:
Purchase cost $50,000
Annual cost savings $15,000
Life of the machine 8 years

The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.

The simple rate of return would be closest to
a)30.0
b)12.5
c)18.75
d)17.5
12. VIM Company purchased $100,000 in inventory from its suppliers on credit terms. The company’s acid-test ratio would most likely
a)decrease
b)be unchanged
c)increase
d)impossible to determine

13. Centerville Company’s debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are $170,000, and working capital is $80,000. Centerville’s long-term liabilities must be
a)80000
b)90000
c)120,000
d)30000

14. Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.

Larkins Company’s price-earnings ratio on December 31, Year 2 was closest to:
a)6.00
b)20.79
c)8.57
d)8.91
15.
Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.

Larkins Company’s return on total assets for Year 2 was closest to
a)15.3%
b)17.0%
c)13.6%
d( 16.0%

16.
Cridwell Company’s selling and administrative expenses for last year totaled $210,000. During the year, the company’s prepaid expense account balance increased by $18,000, and accrued liabilities increased by $12,000. Depreciation charges for the year were $24,000. Based on this information, selling and administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows would be

a)180,000
b)192,000
c)228,000
d)240,000

17. The net present value method assumes that the project’s cash flows are reinvested at the
a)simple rate of return
b)internal rate of return
c)payback rate of return
d)
discount rate used in the net present value calculation.

18.
Which of the following would be classified as a financing activity on the statement of cash flows?

a) Dividends paid to shareholders of the company on the company’s common stock
b) Dividends received on investments in another company’s common stock
c) Interest paid on bonds issued by the reporting company
d) Interest received on investments in another company’s bonds

19. Ignore income taxes in this problem.) The following data pertain to an investment:
Cost of the investment $18,955
Life of the project 5 years
Annual cost savings $5,000
Estimated salvage value $1,000
Discount rate 10%

The net present value of the proposed investment is
a)3355
b)-3430
c)0
d)621

20.
Financial statements for Larkins Company appear below:

Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570

1,540
$180
180
120
50
530

1,480
Total assets $2,110 $2,010

Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250

480
730

120
180
240
840
1,380
$2,110
$130
60
120
310

500
810

120
180
240
660
1,200
$2,010

Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)

Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income $2,760
1,930
830
330
500
50
450
135
$315

Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The market price of a share of common stock on December 31, Year 2 was $150.

Larkins Company’s return on common stockholders’ equity for Year 2 was closest to
a)24.4
b)23.5
c)26.9
d)25.9