### The Impact of Management A+ Solutions

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1. A project profitability index greater than zero for a project indicates that

A. the company should reevaluate its discount rate.

B. the project is unattractive and shouldn't be pursued.

C. there has been a calculation error.

D. the discount rate is less than the internal rate of return.

2. (Ignore income taxes in this problem.) The following data pertain to an investment:

Cost of the investment\$18,955

Life of the project5 years

Annual cost savings\$5,000

Estimated salvage value\$1,000

Discount rate10%

The net present value of the proposed investment is

A. \$621.

B. \$0.

C. \$(3,430).

D. \$3,355.

1. (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:

YearCash Inflows

1\$120,000

260,000

340,000

440,000

540,000

Total\$300,000

Assuming that the cash inflows occur evenly over the year, the payback period for the investment is ___ years.

A. 1.67

B. 2.50

C. 0.75

D. 4.91

1. 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. \$192,000.

B. \$240,000.

C. \$228,000.

D. \$180,000.

2. 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. processed further, since this will increase profits by \$12,500 each period.

B. processed further, since this will increase profits by \$2,500 each period.

C. sold at the split-off point, since further processing would result in a loss of \$0.50 per unit.

D. sold at the split-off point, since further processing will result in a loss of \$2,500 each period.

1. 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. \$30,000.

B. \$120,000.

C. \$90,000.

D. \$80,000.

Use the following information to answer this question.

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

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

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.

1. Larkins Company's earnings per share of common stock for Year 2 was closest to:

A. \$7.21.

B. \$25.00.

C. \$16.83.

D. \$17.50.

2. A company's current ratio and acid-test ratios are both greater than 1. If obsolete inventory is written off, this would

A. increase net working capital.

B. decrease the current ratio.

C. increase the acid-test ratio.

D. decrease the acid-test ratio.

Use the following information to answer this question.

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

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

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.

1. Larkins Company's dividend payout ratio for Year 2 was closest to:

A. 24.6%

B. 40.6%

C. 14.8%

D. 42.9%

2. 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 machine8 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. 12.5%.

B. 17.5%.

C. 18.75%.

D. 30.0%.

1. The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam.

Sales (6,500 Tams at \$130 each)\$845,000

Variable cost of sales390,000

Variable distribution costs65,000

Salary of product line manager25,000

Net operating loss\$(55,000)

Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The operating results reported above for last year are expected to continue in the foreseeable future if the product isn't dropped. The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson. If the Tam product were dropped, there would be no change in the fixed manufacturing costs of the company.

Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines. If the company discontinues the Tam product line, the change in annual operating income (or loss) should be a

A. \$55,000 decrease.

B. \$90,000 decrease.

C. \$70,000 increase.

D. \$65,000 decrease.

1. Brittman Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:

IPNIYD

Selling price per unit\$183.57\$207.74\$348.15

Variable cost per unit\$144.42\$155.04\$269.50

Minutes on the constraint2.903.405.50

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. \$78.65 per unit

D. \$15.50 per minute

1. Which of the following would be considered a "use" of cash for the purpose of constructing a statement of cash flows?

A. Issuing long-term debt

B. Amortizing a patent

D. Selling the company's own common stock to investors

Use the following information to answer this question.

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

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

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.

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

A. 2.1%.

B. 5.0%.

C. 4.1%.

D. 4.6%.

Use the following information to answer this question.

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

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

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.

1. Larkins Company's return on common stockholders' equity for Year 2 was closest to:

A. 25.9%.

B. 24.4%.

C. 26.9%.

D. 23.5%.

2. The net present value method assumes that the project's cash flows are reinvested at the

A. simple rate of return.

B. discount rate used in the net present value calculation.

C. internal rate of return.

D. payback rate of return.

1. VIM Company purchased \$100,000 in inventory from its suppliers on credit terms. The company's acid-test ratio would most likely

A. be unchanged.

C. increase.

D. decrease.

Use the following information to answer this question.

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

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

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.

1. Larkins Company's price-earnings ratio on December 31, Year 2 was closest to:

A. 6.00

B. 8.91

C. 8.57

D. 20.79

Use the following information to answer this question.

The most recent balance sheet and income statement of Teramoto Corporation appear below:

Comparative Balance SheetEnding

Balance Beginning

Balance

Assets:

Cash and cash equivalents

Accounts receivable

Inventory

Plant and equipment

Less accumulated depreciation

Total assets

\$43

53

73

582

301

\$450

\$35

59

69

490

286

\$367

Liabilities and stockholders' equity

Accounts payable

Wages payable

Taxes payable

Bonds payable

Deferred taxes

Common stock

Retained earnings

Total liabilities and stockholders' equity

\$57

21

15

21

20

55

261

\$450

\$48

18

13

20

21

50

197

\$367

Income Statement

Sales

Cost of good sold

Gross margin

Net operating income

Income taxes

Net income

\$893

587

306

189

117

35

\$82

1. The net cash provided by (used by) operations for the year was

A. \$30.

B. \$117.

C. \$112.

D. \$52.

Use the following information to answer this question.

The most recent balance sheet and income statement of Teramoto Corporation appear below:

Comparative Balance SheetEnding

Balance Beginning

Balance

Assets:

Cash and cash equivalents

Accounts receivable

Inventory

Plant and equipment

Less accumulated depreciation

Total assets

\$43

53

73

582

301

\$450

\$35

59

69

490

286

\$367

Liabilities and stockholders' equity

Accounts payable

Wages payable

Taxes payable

Bonds payable

Deferred taxes

Common stock

Retained earnings

Total liabilities and stockholders' equity

\$57

21

15

21

20

55

261

\$450

\$48

18

13

20

21

50

197

\$367

Income Statement

Sales

Cost of good sold

Gross margin

Net operating income

Income taxes

Net income

\$893

587

306

189

117

35

\$82

1. The net cash provided by (used by) investing activities for the year was

A. (\$77).

B. (\$92).

C. \$92.

D. \$77.

Use the following information to answer this question.

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

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

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.

1. 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. debt-to-equity ratio.

D. earnings per share of common stock.

2. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Per Unit

Direct materials\$2.20

Direct labor\$8.50

Supervisors salary\$5.80

Depreciation of special equipment\$7.20

An outside supplier has offered to make the part and sell it to the company for \$24.50 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part N19 could be used to make more of one of the company's other products, generating an additional segment margin of \$25,000 per year for that product. What would be the impact on the company's overall net operating income of buying part N19 from the outside supplier?

A. Net operating income would decline by \$60,700 per year.

B. Net operating income would decline by \$21,900 per year.

C. Net operating income would decline by \$10,700 per year.

D. Net operating income would increase by \$25,000 per year.

Use the following information to answer this question.

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

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

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.

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

A. \$23.33.

B. \$10.00.

C. \$76.67.

D. \$70.00.

2. 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. \$11,900

B. -\$7,600

C. -\$1,400

D. -\$20,900

Use the following information to answer this question.

The most recent balance sheet and income statement of Teramoto Corporation appear below:

Comparative Balance SheetEnding

Balance Beginning

Balance

Assets:

Cash and cash equivalents

Accounts receivable

Inventory

Plant and equipment

Less accumulated depreciation

Total assets

\$43

53

73

582

301

\$450

\$35

59

69

490

286

\$367

Liabilities and stockholders' equity

Accounts payable

Wages payable

Taxes payable

Bonds payable

Deferred taxes

Common stock

Retained earnings

Total liabilities and stockholders' equity

\$57

21

15

21

20

55

261

\$450

\$48

18

13

20

21

50

197

\$367

Income Statement

Sales

Cost of good sold

Gross margin

Net operating income

Income taxes

Net income

\$893

587

306

189

117

35

\$82

1. The net cash provided by (used by) financing activities for the year was

A. \$1.

B. (\$18).

C. \$5.

D. (\$12).

Use the following information to answer this question.

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

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

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.

1. Larkins Company's return on total assets for Year 2 was closest to:

A. 13.6%.

B. 15.3%.

C. 17.0%.

D. 16.0%.

2. Fonics Corporation is considering the following three competing investment proposals:

AyeBeeCee

Initial investment required\$62,000\$74,000\$95,000

Net present value\$10,000\$8,000\$12,000

Internal rate of return15%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. Aye, Bee, Cee

D. Cee, Bee, Aye

1. 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 selling expense\$2

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. \$59

B. \$78

C. \$180

D. \$38

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

A. Dividends received on investments in another company's common stock

B. Interest received on investments in another company's bonds

C. Interest paid on bonds issued by the reporting company

D. Dividends paid to shareholders of the company on the company's common stock

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