Question 1

Below is the balance sheet for Janice Company: Janice Company 
Balance Sheet 
December 31 ,
\(\begin{array}{lrr}&20X6&20X5\
\text { Current assets: }\
\text { Cash } & \$ 380 & \$ 242 \
\text { Accounts receivable } & 430 & 194 \
\text { Inventory } & 238 & 388 \
\text { Prepaid insurance } & 32 & 76\\text { Total current assets }&\$1,080&\$900\\text { Long-term assets: }\\quad \text { Fixed assets } & \$ 406 & \$ 452 \
\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \
\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \
\text { Total assets } & \$ 1,214 & \$ 1,124\\text { Current liabilities: }\
\text { Accounts payable } & \$ 176 & \$ 152 \
\text { Wages payable } & \underline{38} & \underline{32} \
\text { total current liabilities } & \$ 214 & \$ 184\\text { Long-term liabilities: }\\text { Notes payable } & \underline{420} & \underline{420} \
\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\text { Owners' equity: } & & \
\text { Common stock } & \$ 190 & \$ 160 \
\text { Retained income } & 390 & 360\\text { Total owners' equity } & \underline{\$ 580}&\$520 \
\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}
\end{array}\) If a common-size balance sheet were prepared, _____ would be attributable to the 20X5 accounts payable of Janice Company.

Accepted Answer

A)  13.5%
B)  62.3%
C)  25.2%
D)  86.3%  A

Question 2

Company B has 40,000 shares of its common stock outstanding.Company A owns 15,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Accepted Answer

A)  market
B)  equity
C)  cost
D)  consolidated B

Question 3

Intercompany eliminations avoid double counting on consolidated financial statements

Accepted Answer

A) True 
 B)False  True

Question 4

Common-size statements are particularly useful because _____.

Accepted Answer

A)  accounts are aggregated together so the same accounts can be used consistently from year to year
B)  dollars are converted to percentages
C)  they are a means of comparing one company to another company within the same industry
D)  the percentages can be added to and/or subtracted from one another

Question 5

If the fair market value of the subsidiary's assets is greater than the book value of those assets on the date that the subsidiary is acquired, the assets of the subsidiary are written up to their fair market value.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is incorrect?

Accepted Answer

A)  Companies where product costs represent a high percentage of total costs would be expected to have a low gross profit percentage.
B)  A company's current financial ratio should be compared with the same financial ratio for 1)  that company in prior years and/or 2)  the ratio for the industry in which the company is affiliated.
C)  Gross profit percentages do not vary a great deal among industries.
D)  Profitability evaluation ratios are better at predicting income and solvency than are solvency determination ratios.

Question 7

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \
\text { Balance Sheet } && \text { Balance Sheet } \
\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\
\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \
\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \
\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\
\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\
\text { Long-term bonds }&&\text { Long-term bonds }\
\text { payable } & 220 & \text { payable } & 280 \
\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\text { Total liabilities and } & - & \text { Total liabilities and } & \
\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780
\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash._____ is the balance of the Investment in Hall Stock on the consolidated balance sheet immediately after the acquisition of Hall's stock.

Accepted Answer

A)  $-0-
B)  $260
C)  $380
D)  $500

Question 8

Company B has 40,000 shares of its common stock outstanding.Company A owns 35,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Accepted Answer

A)  market
B)  equity
C)  cost
D)  consolidated

Question 9

Common-size statements are expressed in component percentages.

Accepted Answer

A) True 
 B)False

Question 10

The following are the income statements and balance sheets for Goal Company: $\begin{array}{lr}&20X2\
\text { Sales only credit sales)}&\$1,606.0\
\text {Less cost of goods sold }&1,062.0\
\text {Gross profit }&\$544.0\
\text {Less operating expenses }&322.0\
\text {Operating income }&\$222.0\
\text { Less other expense: Interest}&9.6\
\text {Income before tax }&\$212.4\
\text {Less income tax expense }&85.0\
\text { Net income}&\$127.4\
\end{array}$

\(\begin{array}{lrrlrr}&20X2&20X1&&20X2&20X1\
\text { Current assets: } &&&{\text { Current liabilities: }} \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \
\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\text { Long-term assets: } & & & \text { Total current } & & \
\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \
\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\&&&\text { Owners' equity: }\
&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\
&&&\text { Retained income } & 150 & 180\&&&\text { Total owners' equity }&\$230&\$260\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\
\end{array}\)
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The average collection period in days for Goal Company in 20X2 is _____days.

Accepted Answer

A)  5.0
B)  36.8
C)  464.1
D)  40.9

Question 11

Brian Company purchased 10% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by _____.

Accepted Answer

A)  increasing assets and stockholders' equity
B)  increasing stockholders' equity and decreasing investments
C)  increasing investments and cash
D)  having no effect

Question 12

The statement "total liabilities should not exceed net worth" is an example of an):

Accepted Answer

A)  investing rule
B)  benchmark
C)  industry standard
D)  none of these answers is correct

Question 13

Fisher Company acquired 80% of the outstanding shares of Gibbs Company for $152 in cash.The net income was $100 and $20 for Fisher Company and Gibbs Company, respectively.None of the income resulted from intercompany sales.The net income on the consolidated income statement is_____.

Accepted Answer

A)  $80
B)  $96
C)  $100
D)  $116

Question 14

Julia Company acquired 80% of the outstanding shares of Roberts Company for $190 in cash.Roberts Company's total assets and liabilities were $550 and $400, respectively.The balance of the investment in Roberts Company stock on the consolidated balance sheet immediately after the acquisition of Roberts Company's stock is _____.

Accepted Answer

A)  $?0
B)  $440
C)  $190
D)  $120

Question 15

Financial statements are helpful to predict the future performance of a company for all of the following reasons except _____.

Accepted Answer

A)  the evaluation of management's past performance gives clues to its ability to generate future returns
B)  the assets and liabilities of a company provide clues to a company's future prospects
C)  financial statements are required to give formal projections of management's assessment of the next period's financial results
D)  past performance is often a good indicator of future performance

Question 16

If a company uses the equity method to account for long?term equity investments, the company recognizes income from the investee when the investee pays a dividend.

Accepted Answer

A) True 
 B)False

Question 17

Minority interests affect only the balance sheet of the consolidated financial statements.

Accepted Answer

A) True 
 B)False

Question 18

The following information pertains to Barnum Company: Balance Sheet 
At December $ 31,20 \mathrm{X} 2 $
$\begin{array}{lrlr}
\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \
\text { Long-term assets } & 29,700 & \text { Long-term liabilities } & 13,250\
&&\text { Stockholders' equity }&27,550\
\text { Total assets }&\$ 48,400& \text { Total assets }&\$ 48,400 
\end{array}$

Barnum Company
Income Statement
For the Year Ended December $ 31,20 \mathrm{X} 2 $
$\begin{array}{lr}
\text { Sales } & \$ 106,950 \
\text { Less: Cost of goods sold } & \underline{61,800)} \
\text { Gross profit } & \$ 45,150 \
\text { Less: Operating expenses } & \underline{31,700} \
\text { Operating income } & \$ 13,450 \
\text { Less other expenses: interest } & \underline{1,300)} \
\text { Income before taxes } & \$ 12,150 \
\text { Less: Income tax expense } & \underline{4,850)} \
\text { Net income } & \$ 7,300
\end{array}$ There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2.Dividends declared and paid was $5 per share.The dividend payout ratio for 20X2 is _____.

Accepted Answer

A)  9.7%
B)  6.7%
C)  68.5%
D)  100.0%

Question 19

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books at the time Hudson Company paid its dividends and by how much?

Accepted Answer

A)  There is no entry and no effect.
B)  Cash would increase by $2 million and Stockholders' Equity would increase by $2 million.
C)  Cash would increase by $5 million and Stockholders' Equity would increase by $5 million.
D)  Cash would increase by $2 million and Investments would decrease by $2 million.

Question 20

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \
\text { Balance Sheet } && \text { Balance Sheet } \
\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\
\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \
\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \
\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\
\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\
\text { Long-term bonds }&&\text { Long-term bonds }\
\text { payable } & 220 & \text { payable } & 280 \
\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\text { Total liabilities and } & - & \text { Total liabilities and } & \
\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780
\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash._____ is the balance of the cash and other assets on the consolidated balance sheet immediately after the acquisition of Hall's stock.

Accepted Answer

A)  $-0-
B)  $1,280
C)  $780
D)  $1,020

Exam 17: Understanding and Analyzing Consolidated Financial Statements

Company B has 40,000 shares of its common stock outstanding.Company A owns 15,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Intercompany eliminations avoid double counting on consolidated financial statements

Common-size statements are particularly useful because _____.

If the fair market value of the subsidiary's assets is greater than the book value of those assets on the date that the subsidiary is acquired, the assets of the subsidiary are written up to their fair market value.

Which of the following statements is incorrect?

Company B has 40,000 shares of its common stock outstanding.Company A owns 35,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Common-size statements are expressed in component percentages.

Brian Company purchased 10% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by _____.

The statement "total liabilities should not exceed net worth" is an example of an) :

Fisher Company acquired 80% of the outstanding shares of Gibbs Company for $152 in cash.The net income was $100 and $20 for Fisher Company and Gibbs Company, respectively.None of the income resulted from intercompany sales.The net income on the consolidated income statement is_____.

Financial statements are helpful to predict the future performance of a company for all of the following reasons except _____.

If a company uses the equity method to account for long?term equity investments, the company recognizes income from the investee when the investee pays a dividend.

Minority interests affect only the balance sheet of the consolidated financial statements.