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The condensed financial statements of Westward Corporation

RATIO ANALYSIS

The condensed financial statements of Westward Corporation for 2006 are presented below.

Westward Corporation Westward Corporation
Balance Sheet Income Statement
December 31, 2006 For the Year Ended December 31, 2006

Assets Revenues $2,000,000
Current assets Expenses
Cash and temporary Cost of goods sold 1,080,000
investments $ 30,000 Selling and administrative
Accounts receivable 70,000 expenses 495,000
Inventories 120,000 Interest expense 30,000
Total current assets 220,000 Total expenses 1,605,000
Property, plant, and Income before income taxes 395,000
equipment (net) 780,000 Income tax expense 140,000
Total assets $1,000,000 Net income $ 255,000

Liabilities and Stockholders' Equity
Current liabilities $ 80,000
Long-term liabilities 300,000
Common stockholders' equity 620,000
Total liabilities and
stockholders' equity $1,000,000

Additional data as of December 31, 2005: Inventory = $100,000; Total assets = $900,000; Common stockholders' equity = $540,000.

Instructions
Compute the following listed ratios for 2006 showing supporting calculations.

(a) Current ratio = .

(b) Debt to total assets = .

(c) Times interest earned = .

(d) Inventory turnover = .

(e) Profit margin ratio = .

(f) Return on common stockholders' equity = .

(g) Return on assets = .

Internal Control
Six internal control principles related to cash transactions are discussed in the textbook. These principles, with code letters, are:

Code Internal Control Principle
A Establishment of responsibility
B Segregation of duties
C Documentation procedures
D Physical, mechanical, and electronic controls
E Independent internal verification
F Other controls

Instructions
Match the above principles to the following applications related to cash receipts and cash disbursements by placing the code in the space provided. Each code letter can be used once, more than once, or not at all.

____ 1. The duties of receiving and recording cash should be assigned to different individuals.

____ 2. Daily cash counts should be made by cashier department supervisors.

____ 3. Cash receipts should be deposited in bank in total daily.

____ 4. Cash register tapes should be used for over-the-counter receipts.

____ 5. Each check should be compared with approved invoices before being issued.

____ 6. The duties of approving an item for payment and paying the item should be performed by different individuals.

____ 7. All checks should be prenumbered.

____ 8. Only the treasurer should be authorized to sign checks.

____ 9. All personnel who handle cash should be bonded.

____ 10. Blank checks should be stored in a safe, and access should be restricted.

____ 11. Only designated personnel should be authorized to handle and have access to cash receipts.

____ 12. After payment, an invoice should be stamped PAID.

BALANCE SHEET CLASSIFICATIONS

Instructions
Match the account titles given below with the appropriate Balance Sheet classification. An individual classification may be used more than once, or not at all. An account may also not appear in the balance sheet.
Classifications
A. Current Assets E. Current Liabilities
B. Long-term Investments F. Long-term Liabilities
C. Property, Plant and Equipment G. Stockholders' Equity
D. Intangible Assets H. Not separately presented on the Balance Sheet

Account Titles

1. Common Stock 10. Prepaid Insurance

2. Unearned Rent Revenue 11. Bonds Payable

3. Supplies 12. Taxes Payable

4. Accounts Payable 13. Copyrights

5. Patents 14. Accounts Receivable

6. Salaries Payable 15. Mortgage Payable

7. Equipment 16. Dividends

8. Service Revenue 17. Accum Dep Equip

9. Rent Expense 18. Retained Earnings

NORMAL BALANCES

Instructions: Place a "D" (Debit) or "C" (Credit) in the space provided to indicate whether the account has a normal debit balance (D) or normal credit balance (C).
1. Retained Earnings 6. Common Stock
2. Equipment 7. Unearned Service Revenue
3. Depreciation Expense 8. Accumulated Depreciation
4. Dividends 9. Accounts Payable
5. Service Revenue 10. Prepaid Rent

Multiple Choice

1. One of the two constraints in accounting is
a. comparability.
b. materiality.
c. reliability.
d. relevance.

2. The assumption that assumes a company will continue in operation long enough to carry out its existing objectives is the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. time period assumption.

3. All of the following are intangible assets except
a. patents.
b. land improvements.
c. goodwill.
d. franchises.

4. A daily cash count of register receipts made by a cashier department supervisor demonstrates an application of which of the following internal control principles?
a. Documentation procedures
b. Segregation of duties
c. Establishment of responsibility
d. Independent internal verification

. 5. Shipping terms of FOB destination mean that the
a. purchaser is responsible for the shipping charges.
b. shipping charges are debited to Freight-Out.
c. items should be in the purchaser's inventory account at year-end if the items are in transit.
d. both (a) and (c) above.

6. The constraint of conservatism is best expressed as
a. the cost of applying an accounting principle should not exceed its benefit.
b. only material items should be recorded and reported.
c. when in doubt, choose the method that will least likely overstate assets and net income.
d. the lower of cost or market method should be used for inventories.

7. If merchandise is sold for $2,000 subject to credit terms of 2/10, n/30, the entry to record collection in full within the discount period would include a
a. debit to Sales Discounts for $40.
b. credit to Cash for $1,960.
c. credit to Accounts Receivable for $40.
d. none of the above.

8. The objectives of internal control are to
a. prevent unintentional errors and irregularities.
b. safeguard assets and enhance the accuracy and reliability of the accounting records.
c. enhance the accuracy and reliability of financial statements.
d. safeguard assets and prevent thefts.

9. All of the following are basic principles of cash management except
a. keeping inventory levels low.
b. planning the timing of major expenditures.
c. delaying payment of liabilities.
d. keeping idle cash on hand.
10. Petson Company's financial information is presented below.
Sales $ ???? Purchase Returns and Allowances $ 15,000
Sales Returns and Allowances 30,000 Ending Merchandise Inventory 35,000
Net Sales 250,000 Cost of Goods Sold 180,000
Beginning Merchandise Inventory ???? Gross Profit ????
Purchases 170,000

The missing amounts above are:
Sales Beginning Inventory Gross Profit
a. $280,000 $45,000 $70,000
b. $220,000 $45,000 $100,000
c. $280,000 $60,000 $70,000
d. $220,000 $60,000 $100,000

11. Current liabilities are obligations that are reasonably expected to be paid from
Existing Creation of Other
Current Assets Current Liabilities
a. No No
b. Yes Yes
c. Yes No
d. No Yes
12 The primary accounting standard-setting body in the United States is the
a. Securities and Exchange Commission.
b. Accounting Principles Board.
c. Financial Accounting Standards Board.
d. Internal Revenue Service.
13 Which of the following pairs of terms in the area of financial statement analysis are synonymous?
a. Ratio Trend
b. Horizontal Trend
c. Vertical Ratio
d. Horizontal Ratio

14 The Accumulated Depreciation account is a(n)
a. contra asset.
b. liability.
c. asset.
d. operating expense.

15 A post-closing trial balance contains
a. real and nominal accounts.
b. permanent and temporary accounts.
c. balance sheet or permanent accounts.
d. balance sheet and retained earnings statement accounts.

16 The procedure of transferring journal entries to ledger accounts is called
a. journalizing.
b. ledgering.
c. recording.
d. posting.

17 For which of the following types of adjusting entries are liabilities understated and expenses understated before the adjusting entry is made?
a. Unearned Revenues
b. Accrued Revenues
c. Prepaid Expenses
d. Accrued Expenses

18 Transactions are initially recorded in the
a. ledger.
b. trial balance.
c. journal.
d. balance sheet.

19 A debit will reduce ________, but increase ________.
a. accounts receivable; accounts payable
b. expenses; accounts payable
c. accounts payable; common stock
d. common stock; prepaid insurance

20 An accrued revenue account represents revenue that has
a. been earned and received.
b. been received but not earned.
c. not been earned or received.
d. been earned but not received.

21 What type of relationship exists with a prepaid expense adjusting entry?
a. Asset/revenue
b. Expense/liability
c. Asset/expense
d. Liability/revenue

22 The book value of a depreciable asset is defined as the asset's
a. cost less accumulated depreciation.
b. current market value.
c. replacement cost.
d. cost.

23 Sutton Co. recorded a payment of cash on account to a creditor by debiting Accounts Receivable and crediting Cash. The correcting entry is
a. debit Accounts Payable and credit Cash.
b. debit Cash and credit Accounts Receivable.
c. debit Accounts Payable and credit Accounts Receivable.
d. Some other correcting entry is necessary.

24 The three primary accounting problems (issues) associated with accounts receivable are
a. valuation, accelerating cash receipts, and statement presentation.
b. recognition, valuation, and statement presentation.
c. recognition, valuation, and accelerating cash receipts.
d. revenue recognition, matching, and statement presentation.

25 Allowance for Doubtful Accounts is presented as a(n)
a. addition to Accounts Receivable on the balance sheet.
b. operating expense on the income statement.
c. deduction from Sales on the income statement.
d. contra asset on the balance sheet.

26 The use of a cash register for cash receipts is an example of the internal control principle of
a. documentation procedures.
b. physical, mechanical, and electronic controls.
c. independent internal verification.
d. segregation of duties.

27 Cash includes all of the following items except
a. checks.
b. currency.
c. money orders.
d. NSF checks.

28 The objectives of internal control are to
a. prevent unintentional errors and irregularities.
b. safeguard assets and enhance the accuracy and reliability of the accounting records.
c. enhance the accuracy and reliability of financial statements.
d. safeguard assets and prevent thefts.

29 . All of the following are basic principles of cash management except
a. keeping inventory levels low.
b. planning the timing of major expenditures.
c. delaying payment of liabilities.
d. keeping idle cash on hand.

30 Lack of agreement between the cash balance per bank and the cash balance per books is due to
a. errors and poor internal control.
b. errors and bank memoranda.
c. time lags and bank memoranda.
d. time lags and errors.

31 The bank statement that a depositor receives from the bank includes
a. notification of amounts deducted by the bank to cover such things as the cost of a supply of new checks ordered by the depositor.
b. a designation of which checks are still outstanding at the end of the month.
c. a designation of which deposits are in transit at the end of the month.
d. notification of errors made by the depositor in recording checks written during the month in the depositor's accounts.

32 When a customer returns goods for credit, the seller should
a. debit Accounts Payable.
b. credit Accounts Payable.
c. credit Accounts Receivable.
d. debit Sales.

33 Credit terms of 2/10, n/30 mean that a(n)
a. 10% cash discount may be taken if payment is made immediately; a 2% discount if paid within 30 days.
b. 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise the full amount is due at the end of the month.
c. additional amount equal to 2% of the invoice price must be paid if payment is not received within 10 days; the account is overdue after 30 days.
d. 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise the full amount is due within 30 days.

34 A periodic inventory system
a. allows for the determination of cost of goods sold after each sale.
b. requires a physical inventory count to determine the cost of goods on hand.
c. requires that detailed inventory records be kept.
d. requires the use of a cost of goods sold account.

35 In accordance with the revenue recognition principle, sales revenues are recorded when
a. earned, which typically occurs when the goods are transferred from the seller to the buyer.
b. cash is received from the customer for items already delivered.
c. an order is received from a customer with delivery of the product expected to take place within the next 30 days.
d. the accountant determines which period's income statement "needs" more revenue.

36 Which of the following items would appear in the income statement of both a merchandising company and a service company?
a. Cost of goods sold
b. Gross profit
c. Operating expenses
d. Sales

37 Freight terms of FOB shipping point mean that the
a. buyer must bear the freight costs.
b. seller must debit freight out.
c. goods are placed free on board at the buyer's place of business.
d. seller must bear the freight costs.

38 With regard to accounting for a merchandising company versus a service enterprise, which of the following is false?
a. Additional accounts and entries are typically required for a merchandising company.
b. Both retailers and wholesalers are merchandising companies.
c. The operating cycle of a merchandising company is shorter than that of a service company.
d. Merchandise Inventory is an added asset account for a merchandising company.

39 Cost of goods available for sale equals
a. net purchases plus freight in.
b. beginning inventory plus net purchases.
c. beginning inventory plus cost of goods purchased.
d. cost of goods purchased less ending inventory.

40 The Sales Returns and Allowances account
a. normally has a credit balance.
b. should not be closed at the end of the period.
c. is a contra account to Accounts Receivable.
d. is used by a merchandising company, but not a service enterprise.

41 An entry debiting Accounts Payable and crediting Purchase Returns indicates a
a. sale on account to a customer.
b. return of goods originally purchased on account to the supplier.
c. return of goods originally sold on account to a customer.
d. purchase of goods on account from a supplier.

42 . Goods in transit should be included in the inventory of the
a. buyer when the terms are FOB destination.
b. buyer when the terms are FOB shipping point.
c. transportation company when the terms are FOB destination.
d. seller when the terms are FOB shipping point.

43 Given the following information, compute the amount of cash finally remitted by the customer.
Oct. 22Sale on credit, terms of 2/10, n/30$2,000
Oct. 27Allowance granted due to some items being damaged$200
Oct. 31Payment in full received from customer$?
a. $1,646
b. $1,700
c. $1,640
d. $1,764

44 GAAP refers to
a. General Accounting and Auditing Principles.
b. Guidelines for American Accounting Procedures.
c. General Association of Accounting Practitioners.
d. none of the above.

45 The requirement that only transaction data capable of being expressed in terms of money be included in the accounting records relates to the
a. cost principle.
b. monetary unit assumption.
c. economic entity assumption.
d. both a and b above.

46 A financial statement that reports accounting data at a specific date is the
a. income statement.
b. retained earnings statement.
c. balance sheet.
d. statement of cash flows.

47 Which of the following is not considered an external user of accounting information?
a. Creditor
b. Regulatory Agency
c. Labor Union
d. Officers

48 Which of the following is a separate legal entity?
a. Proprietorship
b. Partnership
c. Corporation
d. Sole proprietorship

49 . Which is not an indicator of profitability?
a. Current ratio.
b. Earnings per share.
c. Net income
d. Price-earning ratio.

50 Which of the following is false?
a. Current assets are listed in the order of magnitude (size).
b. Obligations expected to be paid after one year are classified as long-term liabilities.
c. Intangible assets are noncurrent assets that do not have physical substance.
d. Property, plant, and equipment are assets with relatively long useful lives that are used in operating the business.

51 The primary source of GAAP in the United States is the
a. Accounting Principles Board.
b. Internal Revenue Service.
c. Financial Accounting Standards Board.
d. Securities and Exchange Commission.

52 Current assets are listed
a. alphabetically.
b. by importance.
c. by longevity.
d. by liquidity.

53 To be relevant, accounting information must
a. improve the company's internal control.
b. be presented on the balance sheet.
c. be recorded at historical cost.
d. be capable of making a difference in a decision.

54 In accounting, conservatism means choosing the solution that will
a. understate assets or income.
b. be least likely to overstate assets or income.
c. reduce expenses, thereby increasing income.
d. reduce liabilities.

55 Financial statements combining the operations of Sears and Kmart would violate the
a. monetary unit assumption.
b. economic entity assumption.
c. cost principle.
d. full disclosure principle.

56 The Retained Earnings account had a beginning balance of $30,000 and an ending balance of $50,000. If $10,000 of dividends were paid during the period, net income must have been
a. $20,000.
b. $40,000.
c. $10,000.
d. $30,000.

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RATIO ANALYSIS

The condensed financial statements of Westward Corporation for 2006 are presented below.

Westward Corporation Westward Corporation
Balance Sheet Income Statement
December 31, 2006 For the Year Ended December 31, 2006

Assets Revenues $2,000,000
Current assets Expenses
Cash and temporary Cost of goods sold 1,080,000
investments $ 30,000 Selling and administrative
Accounts receivable 70,000 expenses 495,000
Inventories 120,000 Interest expense 30,000
Total current assets 220,000 Total expenses 1,605,000
Property, plant, and Income before income taxes 395,000
equipment (net) 780,000 Income tax expense 140,000
Total assets $1,000,000 Net income $ 255,000

Liabilities and Stockholders' Equity
Current liabilities $ 80,000
Long-term liabilities 300,000
Common stockholders' equity 620,000
Total liabilities and
stockholders' equity $1,000,000

Additional data as of December 31, 2005: Inventory = $100,000; Total assets = $900,000; Common stockholders' equity = $540,000.

Instructions
Compute the following listed ratios for 2006 showing supporting calculations.

(a) Current ratio = 220,000/80,000 = 2.75.

(b) Debt to total assets = 380,000/1,000,000 = 0.38.

(c) Times interest earned = (395,000 + 30,000)/30,000 = 14.17.

(d) Inventory turnover = 2,000,000/120,000 = 16.67.

(e) Profit margin ratio = 255,000/2,000,000 = 12.75%.

(f) Return on common stockholders' equity = 255,000/620,000 = 41.13%.

(g) Return on assets = 255,000/1,000,000 = 25.50%.

Internal Control
Six internal control principles related to cash transactions are discussed in the textbook. These principles, with code letters, are:

Code Internal Control Principle
A Establishment of responsibility
B Segregation of duties
C Documentation procedures
D Physical, mechanical, and electronic controls
E Independent internal verification
F Other controls

Instructions
Match the above principles to the following applications related to cash receipts and cash disbursements by placing the code in the space provided. Each code letter can be used once, more than once, or not at all.

B 1. The duties of receiving and recording cash should be assigned to different individuals.

A 2. Daily cash counts should be made by cashier department supervisors.

D 3. Cash receipts should be deposited in bank in total daily.

D 4. Cash register tapes should be used for over-the-counter receipts.

E 5. Each check should be compared with approved invoices before being issued.

B 6. The duties of approving an item for payment and paying the item should be performed by different individuals.

C 7. All checks should be prenumbered.

A 8. Only the treasurer should be authorized to sign checks.

F 9. All personnel who handle cash should be bonded.

D 10. Blank checks should be stored in a safe, and access should be restricted.

A 11. Only designated personnel should be authorized to handle and have access to cash receipts.

C 12. After payment, an invoice should be stamped PAID.

BALANCE SHEET CLASSIFICATIONS

Instructions
Match the account titles given below with the appropriate Balance Sheet classification. An individual classification may be used more than once, or not at all. An account may also not appear in the balance sheet.
Classifications
A. Current Assets E. Current Liabilities
B. Long-term Investments F. Long-term Liabilities
C. Property, Plant and Equipment G. Stockholders' Equity
D. Intangible Assets H. Not separately presented on the Balance Sheet

Account Titles

1. Common Stock 10. Prepaid Insurance

2. Unearned Rent Revenue 11. Bonds Payable

3. Supplies 12. Taxes Payable

4. Accounts Payable 13. Copyrights

5. Patents 14. Accounts Receivable

6. Salaries Payable 15. Mortgage Payable

7. Equipment 16. Dividends

8. Service Revenue 17. Accum Dep Equip

9. Rent Expense 18. Retained Earnings

NORMAL BALANCES

Instructions: Place a "D" (Debit) or "C" (Credit) in the space provided to indicate whether the account has a normal debit balance (D) or normal credit balance (C).
1. Retained Earnings 6. Common Stock
2. Equipment 7. Unearned Service Revenue
3. Depreciation Expense 8. Accumulated Depreciation
4. Dividends 9. Accounts Payable
5. Service Revenue 10. Prepaid Rent

Multiple Choice

1. One of the two constraints in accounting is
a. comparability.
b. materiality.
c. reliability.
d. relevance.

2. The assumption that assumes a company will continue in operation long enough to carry out its existing objectives is the
a. economic entity ...

Solution Summary

This solution is comprised of a detailed explanation to compute the following listed ratios for 2006 and match the accounting principles to the following applications related to cash receipts and cash disbursements by placing the code in the space provided.

$2.19