LO1 Management Issues
Indicate whether each of the following actions is primarily related to
(a) acquisition of long-term assets, (b) evaluating the adequacy of financing of
long-term assets, or (c) applying the matching rule to long-term assets.
1. Deciding between common stock and long-term notes for the raising of
2. Relating the acquisition cost of a long-term asset to the cash flows generated
by the asset
3. Determining how long an asset will benefit the company
4. Deciding to use cash flows from operations to purchase long-term assets
5. Determining how much an asset will sell for when it is no longer useful to the
6. Calculating free cash flow
Free Cash Flow
SE 2. Rak Corporation had cash flows from operating activities during the past
year of $97,000. During the year, the company expended $12,500 for dividends;
expended $79,000 for property, plant, and equipment; and sold property, plant,
and equipment for $6,000. Calculate the company's free cash flow. What does
the result tell you about the company?
L02 Determining Cost of Long-Term Assets
SE 3. Smith Auto purchased a neighboring lot for a new building and parking
lot. Indicate whether each of the following expenditures is properly charged to
(a) Land, (b) Land Improvements, or (c) Buildings.
1. Paving costs
2. Architects' fee for building design
3. Cost of clearing the property
4. Cost of the property
5. Building construction costs
6. Lights around the property
7. Building permit
8. Interest on the construction loan
LO2 Group Purchase
SE 4. Lian Company purchased property with a warehouse and parking lot for
$1,500,000. An appraiser valued the components of the property if purchased
separately as follows:
Determine the cost to be assigned to each component.
L03 Straight-Line Method
SE 5. Kelly's Fitness Center purchased a new step machine for $16,500. The
apparatus is expected to last four years and have a residual value of $1,500. What
will the depreciation expense be for each year under the straight-line method?