Principles of Financial Accounting Final ExamMatlab

Java Python Principles of Financial Accounting

Final Exam

Part I: Shorter questions (24 points = about 15 minutes)

1. Which of the following statements is correct? (3 points)

A) Revenue is recognized at the time of shipment when goods are shipped FOB destination.

B) Sales returns and allowances are reported as operating expenses on an income statement.

C) A seller records revenue when title and risks of ownership transfer to the buyer.

D) Sales discounts are reported as cost of sales on an income statement.

2. If a bond is issued at 98, the coupon rate was: (3 points)

A) higher than the market rate of interest.

B) lower than the market rate of interest.

C) equal to the market rate of interest.

D) not related to the market rate of interest.

3. Which of the following statements is correct? (3 points)

A) A 2-for-1 common stock split decreases both earnings per share and stockholders' equity.

B) A 10% common stock dividend decreases both earnings per share and stockholders' equity.

C) A 2-for-1 common stock split increases both the number of common shares outstanding and stockholders' equity.

D) A 30% common stock dividend increases the number of common shares outstanding and does not affect stockholders' equity.

4. On August 1, Red Company purchased computer equipment for $10,000 cash and also gave 100 shares of White common stock that Red Company held as an investment. The White common stock cost Red Company $5,000 and on August 1 had a fair value of $4,200. The installation costs for the computer equipment were $700 and shipping costs were $500. What amount should be the total amount debited to the computer equipment account? (3 points)

A) $14,200.

B) $15,000.

C) $15,400.

D) $16,200.

5. Which one of the following would not be recorded as an intangible asset? (3 points)

A) Patents

B) Copyrights

C) Internally generated goodwill

D) Franchises

6. Which of the following transactions would be reported as cash flow from investing activities? (3 points)

A) The cash purchase of land at a price in excess of appraised value.

B) The purchase of a building in exchange for common stock.

C) The receipt of a stock dividend from a stock investment.

D) The cash receipt of a dividend from a stock investment.

7. Given the following information:

• Accounts receivable written-off as uncollectible during the year amounted to $11,500.

• Accounts receivable balance at the beginning of the year was $150,000.

• Accounts receivable balance at the end of the year was $210,000.

• Allowance for doubtful accounts balance at the beginning of the year was $14,000.

• Allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900.

• Credit sales during the year totaled $900,000. How much was bad debt expense? (3 points)

A) $11,500.

B) $12,900.

C) $10,400.

D) $14,000.

8. Which of the following businesses would not be as likely to use the specific identification method of inventory valuation? (3 points)

A) An automobile dealer.

B) A custom jewelry store.

C) A grocery store.

D) An art dealer.

Part II: Longer questions (13 points = about 20 minutes)

9. Keeping all else equal, explain in one sentence each what this news implies for the following in near future (higher/lower/no effect) and why: (8 points)

10. Harley-Davidson decided to purchase a new factory with a 10 year loan. It agreed to pay $0.5m after the first year and $1.5m each of the subsequent years. The appropriate rate for such a project is 8%.  Using  PV tables, what would be the reported liability on the balance sheet? (5 points)

Part III: Business application: IBM (24 points = about 20 minutes)

International  Business  Machines&nb Principles of Financial Accounting Final ExamMatlab sp; Corporation  (IBM)  is  a   multinational  technology  firm  with operations in computer hardware and software, as well as cloud computing. Use the attached excerpts from its financial statements to answer questions in Part III.

11. How long is the warranty that IBM offers on its hardware products? (2 points)

12. How much did IBM charge to the cost of sales for product warranties in 2018? (2 points)

13. IBM has a substantial exposure to customers’ receivables. List four sources of information the firm uses to analyze their individually evaluated clients. (2 points)

14. IBM uses some interesting methods to measure doubtful accounts from clients. Consider the following one, similar to an aging analysis. The firm estimates the allowance  rates based on customers’ creditworthiness. For any investment grade client, it expects not collect about 10% of receivables. A non-investment grade typically requires a 30% allowance rate, except of clients with the lowest credit standing, for which the rate is set at 95%. Calculate the ending balance of the allowance for doubtful debt on the portfolio of Loan Receivables in Americas in 2018. Assume that the beginning allowance for this very portfolio amounted to $1,200m, and that IBM needed to write-off $200 of loan receivables. (3 points)

15. What were the gross amounts of intangible assets that IBM had at the end of 2017 and 2018? What was the main reason for this change? (2 points)

16. Firms have an option whether to capitalize software costs. Had IBM chosen not to capitalize software, would the retained earnings in 2018 be higher or lower and by how much? Ignore any tax considerations. (2 points)

17. What was the IBM’s total amount of long-term debt outstanding in 2018? (2 points)

18. What was the longest maturity of debt that IBM issued? (2 points)

Q19-24 worth 19 points were based on topics we did not cover in 2024

25. In the note on contingencies, IBM wrote about ongoing tax examinations. Even though the total amount is stated at $900m, the firm did not recognize a liability. They concluded that this amount is not a “meaningful indicator of liability”. Provide a proper reasoning based on relevant US GAAP standards. (2 points)

26. IBM mentions one specific covenant based on the net interest expense ratio. Think of this ratio as the interest coverage ratio. What was the covenant’s value as of Dec 31, 2018 if EBIT amounted to $12,065m? (2 points)

27. Suppose IBM recognized and paid the aforementioned tax liability in 2018. Quantify the effect of this transaction on the covenant. (3 points)

Part IV: Business application: Exxon Mobil (20 points = about 35 minutes)

Exxon  Mobil  is  a  large oil and gas  company.  Use the  attached  excerpts from  its financial statements to answer questions in Part IV.

28. How many shares did Exxon had outstanding at the end of 2018? (2 points)

29. Provide the complete journal entry for the change in Exxon’s treasury stock in 2018. (3 points)

30. How much in total did Exxon pay in dividends to common shareholders in 2018? (2 points)

31. In which section of the cash flow statement would you find this outflow? (2 points)

32. What is the value of inventories Exxon had at the end of 2018? (2 points)

33. Which cost flow assumption does Exxon use to value most of its inventory? (2 points)

34. Assume that the FIFO cost of inventories approximates their current replacement cost. What would be the book value of inventories using FIFO on Dec 31, 2018? (2 points)

35. Did Exxon save taxes cumulatively over the years since inception up to December, 31, 2018 by using LIFO instead of FIFO as a cost flow assumption for all inventories? If so, by how much assuming a 35% tax rate? If not, why? (2 points)

36. Suppose your grandparents  bought  1,000  shares  of Exxon  in  1975.  How  much  did  they receive in dividends since 2016 assuming have kept all shares since then? [Hint: think about the share split history