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17. Three years ago a piece of equipment was purchased for $10,000. Assuming an eight-year life and straight-line depreciation, financial statements for the third year will show:
a. depreciation expense of $3,000 on the income statement, and accumulated depreciation
of $3,000 on the balance sheet.
b. depreciation expense of $1,250 on the income statement, and accumulated depreciation
of $3,000 on the balance sheet.
c. depreciation expense of $1,250 on the income statement, and accumulated depreciation
of $3,750 on the balance sheet.
d. depreciation expense of $1,250 on the income statement, and accumulated depreciation
of $1,250 on the balance sheet.

18. Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of goods sold will be 40% of the sale price. Depreciation expense will be $3,000, interest expense $2,500, and other expenses will be $4,000. Wessel's tax rate is 20%. What will Wessel Corp's net income be for 2005?
a. $ 3,500
b. $ 6,800
c. $14,000
d. $16,400
e. $28,400

19. Albert Corp. bought a machine for $10,000 thirteen years ago. It has been depreciated on a straight line basis over a 20 year life with no salvage value. The firm just sold the machine for $6,000. How much gain/loss should be reported on the sale.
a. $4,000 loss
b. $2,500 loss
c. No gain or loss should be recorded
d. $2,500 gain
e. $4,000 gain

20. A corporate bond is yielding 9%. You are in the 35% tax bracket. What is the after tax yield on the bond?
a. 5.85%
b. 8.10%
c. 3.90%
d. 12.15%

21. Which of the following is a tax deductible expense?
a. Repayment of the principle portion of a loan
b. Dividends
c. The purchase of inventory
d. Depreciation

22. The principal function of financial statements is to:
a. convey information to managers, investors, and creditors
b. provide benchmark information for projecting the firm's future performance
c. inform the firm's shareholders of its likely prospects for growth and cash flows
d. all of the above

23. Dividend payments are categorized as:
a. cash flow from operating activities.
b. cash flow from investment activities.
c. cash flow from financing activities.
d. all of the above

24. A source of cash would be generated by which of the following?
a. An increase in accounts receivable
b. An increase in inventory
c. A decrease in accrued expenses
d. An increase in accounts payable

25. A use of cash would be generated by which of the following?
a. An increase in accounts receivable
b. A decrease in inventory
c. An increase in accounts payable
d. An increase in accrued expenses

26. Ratios are used to analyze activities in the following areas:
a. asset management; liquidity; profitability; dividend use; debt management, market value
b. profitability; asset management; liquidity; debt management; growth, market value
c. asset management; liquidity; profitability; debt management, market value
d. asset utilization; liquidity; profitability; debt management; security analysis

27. The quick ratio is the same as current ratio except it does not consider
a. cash
b. accounts receivable
c. prepaid items
d. inventories

28. The ratio group most likely to be used to indicate a firm's ability to meet short-term financial obligations would be
a. liquidity ratios
b. financial leverage ratios
c. activity ratios
d. profitability ratios

29. Which of the following actions will improve the current ratio?
a. Take a nine-month loan from the bank to pay off some of its suppliers
b. Accelerate the collection of accounts receivable
c. Sell off some old equipment
d. All of the above

30. Which of the following is not part of the cash conversion cycle?
a. Receivable c. Inventory
b. Sale d. none of the above

31. Ratios by themselves have some value, but not nearly as much as they have when compared with other similar figures. Which of the following comparisons are generally used by managers and analysts?
a. history c. budget
b. the competition d. all of the above

32. The following is the income statement of a firm.
Sales $100,000
COGS 80,000
Gross Profit 20,000
Cash Expenses 8,000
Depreciation 1,600
EBIT 10,400
Interest 800
EBT 9,600
Taxes 3,600
Net Income $ 6,000
Its return on sales is:
a. 10.4% c. 6.0%
b. 9.6% d. 20.0%

Solution Preview

17. Three years ago a piece of equipment was purchased for $10,000. Assuming an eight-year life and straight-line depreciation, financial statements for the third year will show:

Depreciation every year = 10000/8 = 1250
After 3 years: 1250*3 = 3750
Book value at year 3 = 10000-3750 = 6250

So, for year 3, your financial statements should show an accumulated depreciation of 3750 and depreciation expense for that year, 1250.

c. depreciation expense of $1,250 on the income statement, and accumulated depreciation
of $3,750 on the balance sheet.
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18. Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of goods sold will be 40% of the sale price. Depreciation expense will be $3,000, interest expense $2,500, and other expenses will be $4,000. Wessel's tax rate is 20%. What will Wessel Corp's net income be for 2005?

Sales = 1000*45 = 45000
COGS = .40*45000 = 18000
Dep expense = 3000
Interest expense = 2500
Other expenses = 4000
Earnings before taxes = 45000-18000-3000-2500-4000 = 20500
Taxes = .20*20500 = 4100
Net income = 20500 - 4100 = 16400

d. $16,400
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19. Albert Corp. bought a machine for $10,000 thirteen years ago. It has been depreciated on a straight line basis over a 20 year life with no salvage value. The firm just sold the machine for $6,000. How much gain/loss should be reported on the sale.

Yearly depreciation = 10000/20 = 500
Accumulated depreciaiton at year of sale = 500*13 = 6500
Book value = 10000-6500 = 3500
Sold for 6000
Since it was sold for more than the book value, it is definitely a gain.
Gain = 6000-3500 = 2500

d. $2,500 gain

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20. A corporate bond is ...

Solution Summary

The solution addresses a number of problems and questions dealing with straight-line depreciation, profitability ratios, financial ratios, shareholders, depreciation, competition, accumulated, comparisons, utilization, inventories, information, income statements, after tax yield.

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