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3A-W'07-EXAM#1-KEY - a Econ 3A Financial Accounting W'O...

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Unformatted text preview: a. Econ 3A - Financial Accounting - W'O'? Exam #1 - 100 points (show all your work; use good form) ANSWER KEY PROBLEM 1 (30 points) As of the end of its most recent fiscal year 2006, Gap, Inc. reported $5,425 million of total stockholders’ equity and its debt to total assets ratio was .38499. Compute the amount that Gap reported for total liabilities as of fiscal year-end 2006. Assets = Liabilities + Equity Assets = .38499*Assets + $5,425 .61501*Assets = $5,425 Assets = $8,821 Assets = Liabilities + Equity Assets — Equity = Liabilities $8,821 — $5,425 = $3,396 Gap, lnc.’s free cash flow for fiscal 2006 was $951 million; its capital expenditures were $600 million, dividends paid were $179 million, and purchases of short-term investments were $123 million. How much cash was provided by operations during 2006? Free cash flow = CFFO — Cap exp — Dividends $951 = CFFO — $600 — $179 $1,730 = CFFO Note: purchases of short-term investments are irrelevant. Google, Inc. first sold stock to the public in 2004. As of year-end 2005, Google. reported total assets of just over $10 billion, of which more than $8 billion was held in cash and marketable securities. Give several reasons why Google’s 2005 balance sheet so lopsidedly consisted of highly liquid assets. In addition to the business reasons, your answer should consider the limitations of balance sheets under the accounting model used in the United States. Substantial sums were raised in its 2004 IPO. High profits and cash flows since inception. Not capital intense (little PPE needed). Omitted intangibles: human, technological, and brandname — costs of developing each were expensed under US GAAP because not objectively measurable as assets. Principle or principal? Your high school princip__ recommended that you take a college accounting course for the princip__ purpose of learning about generally accepted accounting princip___s, including proper accounting for debt princip__, and he implored you that for every assignment and exam in that course, you maintain your princip__s and not engage in academic dishonesty. AL AL LE AL LE Which one of the four basic assumptions justifies stating assets at cost rather than liquidation values? Explain. Going concern. The going concern assumption states that the business will remain in operation for the foreseeable future and thus recover the cost of its assets. If a business were not expected to be a going concern, statements readers would be more interested in knowing what the assets would bring on the auction block. Explain why the following statement is true or false: "Debits are good; credits are bad." Debits and credits are not qualitative in nature but simply locational indicators in the T-accounts: debits on the left, credits on the right. PROBLEM 2 (70 points) The following transactions and events occurred during the first year (calendar year 2006) of GAGGLE IT, Inc, a new internet search engine company. FAQ-*rbeoes» Stockholders contributed $100,000 in cash. Borrowed $200,000 from a venture capital firm. Paid cash of $175,000 for land to be used as a server site. Billed advertising customers, based on the number of hits during the year, for $600,000. $550,000 was received in cash from customers billed in (d). Paid $500,000 in cash for expenses (salaries, equipment rent, interest, etc.). Repaid $150,000 to the venture capital firm. Paid the stockholders $10,000 in the form of a dividend. Required: Journalize each transaction, post the journal entries to the appropriate T- accounts, and from this information, prepare—in good form—a year-end balance sheet, and an income, a statement of retained earnings, and a statement of cash flows for the year. See Excel documents attached. ...
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