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1

INVY-0063

The following information pertains to Fox Co. for the calendar year 2:

Sales (all on credit)       $2,000,000

Gross profit on sales          900,000

Net income                          150,000

Purchases                         1,000,000

Inventory at end of year    200,000

Accounts receivable at beginning of year 600,000

Accounts receivable at end of year 400,000

Stockholders’ equity at end of year:  

     Common stock outstanding (unchanged during year)—300,000 shares at par of $1 per share                                                                $300,000 

Retained earnings                             500,000             800,000

 Dividends paid during the year totaled $0.25 per share.  The market price per share of Fox’s stock was $5 at the end of the year.  Fox’s inventory turnover for year 2 was

  1. 2 times.
  2. 2.2 times.
  3. 4.4 times.
  4. 5 times.

 

Cost of goods sold 
Average inventory

Although cost of goods sold is not given, it is equal to sales minus gross margin on sales ($2,000,000 − $900,000 = $1,100,000).  Beginning inventory (not given) equals cost of goods sold plus ending inventory (given) minus purchases ($1,100,000 + $200,000 − $1,000,000 = $300,000). Average inventory is the sum of the beginning and ending inventory divided by 2 [($300,000 + $200,000) ÷ 2 = $250,000]. Finally, using the above formula, the inventory turnover is $1,100,000 ÷ $250,000 = 4.4 times.

2

STK-0107

Boe Corp.’s stockholders’ equity at December 31, year 2, was as follows:
 

6% noncumulative preferred stock, $100 par (liquidation value $105 per share)$100,000

Common stock, $10 par 300,000

Retained earnings 95,000


At December 31, year 2, Boe’s book value per common share was

  1. $13.17
  2. $13.00
  3. $12.97
  4. $12.80

The book value per common share is calculated as common stockholders’ equity divided by outstanding shares.  If preferred dividends are in arrears, the preferred stock is participating, or if preferred stock has a redemption or liquidation value higher than its carrying amount, retained earnings must be allocated between the preferred and common stockholders in computing book value. In this problem, the liquidation value of the preferred stock is $105,000 ($105,000 − $100,000), which is more than the carrying amount ($100,000) of the preferred stock.  Thus, the following allocation must be made:

3

AICPA.082118FAR-I.C

Redwood Co.'s financial statements had the following information at year end:

Cash$ 60,000

Accounts receivable180,000

Allowance for uncollectible accounts8,000

Inventory240,000

Short-term marketable securities90,000

Prepaid rent18,000

Current liabilities400,000

Long-term debt220,000

What was Redwood's quick ratio?

  1. 0.81 to 1
  2. 0.83 to 1
  3. 0.94 to 1
  4. 1.46 to 1

1. The quick ratio is the quotient of very liquid current assets to total current liabilities. Inventories and prepaids are not included in the numerator because they are not considered sufficiently liquid. As such, it is a more stringent test of liquidity than the current ratio. In this case, the quick ratio consists of: cash + net AR + marketable securities divided by current liabilities: ($60,000 + $180,000 − $8,000 + $90,000)/$400,000) = .805. The closest answer is 0.81 to 1.

4

AICPA.930516FAR-P2-FA

On December 31, Year 2, Curry Co. had the following balances in selected asset accounts:

                                                    Year 2                Increase over Year 1

Cash                                              $300                              $100

Accounts receivable, net             1,200                               400

Inventory                                         500                               200

Prepaid expenses                           100                                  40

Other assets                                   400                                 150

Total assets                               $2,500                              $890

============

Curry had current liabilities of $1,000 on December 31, Year 2 and net credit sales of $7,200 for the year ended.

What was the average number of days to collect Curry's accounts receivable during Year 2?

  1. 30.4
  2. 40.6
  3. 50.7
  4. 60.8

3. This computation uses a value of $400 for beginning Year 2 AR. This is a math error because $400 is the amount by which AR increased during the period. Beginning Year 2 AR was $800.

5

STK-0104

Selected information for Irvington Company is as follows:

December 31

                                                                                                              Year 1           Year 2

Preferred stock, 8%, par $100, nonconvertible, noncumulative   $125,000    $125,000

Common stock                                                                                   300,000     400,000

Retained earnings                                                                                 75,000     185,000

Dividends paid on preferred stock for year ended                             10,000       10,000

Net income for year ended                                                                   60,000    120,000

Irvington’s return on common stockholders’ equity, rounded to the nearest percentage point, for year 2 is

  1. 17%
  2. 19%
  3. 23%
  4. 25%

3. 

Irvington’s return on common stockholders’ equity for year 2 is computed by dividing net income available to common stockholders (net income less preferred dividends) by average common stockholders’ equity.

$120,000 − $10,000

($375,000 + $585,000)/2

                  = 23%

6

CACL-0113

Lind Corp. declared a cash dividend of $50,000 on March 10, year 2, to stockholders of record March 25, year 2, payable on April 5, year 2. As a result of this cash dividend, working capital

  1. Decreased on March 10 by $50,000.
  2. Decreased on March 25 by $50,000.
  3. Decreased on April 5 by $50,000.
  4. Did not change.

1.

This answer is correct. Lind Corporation makes the following entry to record the dividend on the declaration date (March 10, year 2):

Dividends declared50,000 

          Dividends payable 50,000

No entry is made on the date of record (March 25, year 2).  When the dividends are paid on April 5, year 2, Lind makes the following entry:
 

Dividends payable50,000 

          Cash 50,000

Working capital equals current assets minus current liabilities.  On March 10, current liabilities (dividends payable) increased by $50,000, thereby reducing working capital by $50,000.  On April 5, both a current asset (cash) and a current liability are decreased by the same amount ($50,000), and this therefore has no effect on total working capital.

7

AICPA.910538FAR-TH-FA

On December 30, 2004, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1. 

On December 31, 2004, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

        Current ratio                     Quick ratio

  1. Decreased                        Decreased
  2. Decreased                        Increased
  3. Increased                          Decreased
  4. Increased                          Increased

3. Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased.