Please describe the purpose of the Statement of Cash Flows and the interrelationship between the statement of cash flows and the other major financial statements we covered in this class. In your answer, please also address which financial statements should be created before the Statement of Cash Flows, if any, and which financial statements need to be completed after the Statement of Cash Flows, if any. (Points : 25)

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Question 2. 2. (TCO E) Your friend, Lisa, plans to open a nail salon. Lisa states that she does not have time to develop and implement a system of internal controls.

(a) Explain to Lisa the components of internal control. (10 points)

(b) Explain to Lisa at least 5 internal control procedures she must establish to protect herself against fraud. You should state specific internal control procedures from the textbook, and relate your answer to her nail salon business. (15 points) (Points : 25)

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Question 3. 3. (TCO H) ABC Corporation purchased 5, $1,000, 6% bonds of Langley Corporation when the market rate of interest was 8%. Interest is paid semiannually on the bonds, and the bonds mature in 5 years.

 

Instructions:

Compute the total price paid by ABC Corporation for the bonds showing your calculation for the present value of the principal and the present value of the interest payments.

 

Present value tables (Exhibit 8-14 and Exhibit 8-15) are available on pages 452 and 453 of your Harrison, Horngren, and Thomas textbook.  NOTE:  Be sure you review the PV Tables completely to ensure you find the correct period and interest rate for the calculation. (Points : 20)

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Question 4. 4. (TCO A) The following items are taken from the financial statements of BCT Company for 2013:

Cash

$138,800

Accounts Payable

75,000

Supplies

15,000

Accounts Receivable

35,000

Inventory

45,000

Salaries Payable

30,000

Unearned Revenue

45,000

Property, plant, and equipment, net

318,000

Intangible assets

260,000

Common Stock

100,000

Additional Paid-in Capital

400,000

Retained Earnings, 12/31/2012

21,000

Long-term debt

90,000

Service revenue

746,000

Cost of Goods Sold

639,200

Rent expense

30,000

Supplies expense

5,000

Insurance expense

21,000

 

 

Instructions:

(1) Create a classified balance sheet in good form for the year ended 2013. (30 points)

(2) Calculate the current ratio and debt ratio and explain your findings. (6 points) (Points : 36)

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Question 5. 5. (TCO B) The Alpha Company gathered the following condensed data for the year ended December 31, 2014:

Preferred stock dividends paid

 

$50,000

 

Net Sales

 

825,000

 

Interest revenue

 

10,000

 

Selling expenses

 

225,000

 

Administrative expenses

 

125,000

 

Cost of Goods Sold

 

400,000

 

Income tax percentage

 

30%

 

 

 

Instructions:

(1) Prepare a multiple-step income statement for the year ended December 31, 2014. (30 points)

 

(2) Compute the gross margin percentage and net profit margin ratio. Alpha Company’s assets at the beginning of the year were $1,500,000, and the assets were $1,400,000 at the end of the year. To qualify for full credit, you must state the formula you are using, show your computations, and explain your findings. (6 points) (Points : 36)

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Question 6. 6. (TCO C) This is a 2-part question.

Part 1) Indicate which section of the statement of cash flows should contain each of the following items, and whether each item would result in an inflow or outflow of cash. The sections are Operating, Investing, and Financing. (30 points)

(a) Amortization of a patent

(b) Increase in accounts payable

(c) Paid cash dividends to common stockholders

(d) Purchased equipment with cash

(e) Increase in inventory

 

Part 2) Please explain how to calculate free cash flow and the importance of free cash flow to investors. (6 points) (Points : 36)

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Question 7. 7. (TCO F) This is a 2-part question.

Part 1) Journalize the adjusting entries below at year-end December 31, XXXX. Please share your supporting calculations for the adjusting entries requiring computations.

(a) Beginning prepaid insurance, $500. Payments for insurance during the period are $900. Ending prepaid insurance is $600.

(b) Interest revenue of $1,500 has been earned but not yet received.

(c) Accrued Service Revenue of $12,000

(d) The weekly payroll is $20,000. Employees are owed for 4 days of a 5-day work week.

The unadjusted balance of the Supplies account is $1,200. The total cost of supplies remaining is $300.

(f) Equipment was purchased at the beginning of the year for $25,000. The equipment’s useful life is 5 years, and the residual value is $5,000. Record the depreciation for this year.

(30 points)

 

Part 2) Calculate the overall overstatement or understatement of net income if the above adjusting entries were not made. Please share your work. (6 points) (Points : 36)

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Question 8. 8. (TCO G) Please review the following 6 ratios for Johnson Company and Lee Enterprises for the year ended 2014, and address the 2 questions below.

Ratio Name

 

Johnson Company

 

Lee Enterprises

 

(a) Accounts receivable turnover

 

6.5

 

5.3

 

(b) Days’ inventory outstanding

 

40

 

35

 

(c) Debt ratio

 

29.3%

 

25.7%

 

(d) Return on common stockholders’ equity

 

14.7%

 

10.5%

 

(e) Current ratio

 

2.50

 

3.60

 

(f) Price/Earnings ratio

 

10

 

12

 

 

Instructions: This is a 2-part question.

(1) Explain the meaning of each of the Johnson Company ratios above. (18 points)

(2) State which company performed better for each ratio. (18 points) (Points : 36)

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