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Sproule midterm s2004

# Sproule midterm s2004 - UNIVERSITY OF WATERLOO School of...

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UNIVERSITY OF WATERLOO School of Accountancy ACC 101/121 Mid-Term Examination Date and Time: June 11, 2004, 2 hours Spring 2004 Pages: 18, including cover Professor: R.J Sproule NAME: ID#: Please circle the section you are registered in: S01 8:30am-10:00am T/Th S02 1:00pm-2:30pm T/Th Instructions: 1) Non-programmable calculators may be used 2) Answer all the questions in the space provided in the exam, except the multiple choice questions. 3) Hand in the entire examination paper 4) Show details of all calculations you perform. 5) Please verify that this examination paper has the appropriate number of pages. Question Maximum Marks Mark Awarded 1 12 2 14 3 8 4 7 5 7 6 12 7 30 Total 90

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Question 1 (12 marks, 16 minutes) The following data is from Gauthier Machine Shop, at December 31 2003 2002 2001 Total Assets \$ 500,000 \$ 475, 000 \$ 450,000 Total Liabilities \$ 200,000 \$ 190, 000 \$ 170,000 Total Stockholders’ Equity \$ 300,000 \$ 285,000 \$ 280,000 Sales \$ 1,000,000 \$ 900,000 \$ 820,000 Net income \$ 140,000 \$ 120,000 \$ 110,000 Required: A. Compare Gauthier Machine Shop’s asset turnover ratio for the two most recent years (4 marks) 2003 2002 \$1,000,000 = 2.05 \$900,000 = 1.95 (\$500,000 + \$475,000)/2 (\$475,000 + \$450,000)/2 B. Comment on the trend of this ratio (2 marks) Improving, Gauthier is doing a better job of managing their assets. C. Compute Gauthier Machine Shop’s financial leverage ratio for the two most recent years. (4 marks) 2003 2002 (\$500,000 + \$475,000)/2 = 1.67 (\$475,000 + \$450,000)/2 = 1.64 (\$300,000 + \$285,000)/2 (\$285,000 + \$280,000)/2 D. Comment on the trend of this ratio (2 marks) Use of financial leverage has grown, which has increased the risk associated with the use of debt to finance assets. Question 2 (14 marks, 19 minutes) 2
Use the following information to prepare a statement of cash flows for Statler Equipment Company for 2003: (11 marks) Please use the table on the following page to complete this part of the question. Net income of the year 2003 was \$5,000. Accounts receivable decreased \$2,000, while inventories increased \$4,000, and accounts payable decreased \$7000. Amortization expense included in net income was \$8,000. During the year, a piece of land held for future expansion was sold for its book value of \$8,000 and a new service truck was purchased for \$14,000. The company borrowed \$18,000 on a two-year note from the bank. Dividends of \$6,000 were paid in cash. Preferred stock was issued to retire \$7, 000 of long-term notes payable. The beginning cash balance was \$10,000 and the ending balance was \$20,000. B. Calculate the Quality of Income Ratio: (2 marks) \$4,000 = .80 \$5,000 C. Name one other measure, or piece of information, that would help you evaluate your answer in part B (1 mark). Prior year’s ratio, industry average ratio, benchmark ratio, competitor’s ratio

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Sproule midterm s2004 - UNIVERSITY OF WATERLOO School of...

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