1.
Cung Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?
Explanation
The incremental effect on the company's overall profit of reworking and selling the material rather than selling it as scrap would be -$700. This can be calculated by subtracting the cost of reworking ($1,400) from the selling price of the reworked material ($30,800), and then subtracting the scrap value of the material as is ($30,100). The result is -$700, indicating a decrease in profit compared to selling the material as scrap.
2.
A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:
Explanation
If Product A is dropped, the company's overall net operating income would decrease by $10,000 per year. This can be calculated by subtracting the variable expenses ($140,000) and the portion of fixed expenses that will continue ($40,000) from the sales of the product ($200,000). The remaining amount is $20,000, which represents the decrease in net operating income.
3.
Management at Kelsh is pondering the elimination of North Division. If North Division were eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses would be unaffected. Given these data, the elimination of North Division would result in an overall company net operating income of:
Explanation
If the North Division is eliminated, its traceable fixed expenses would be avoided. This means that the expenses directly associated with the North Division would no longer be incurred. However, the total common corporate expenses would remain the same. Since the question states that the total common corporate expenses would be unaffected, it implies that these expenses are not allocated to the North Division. Therefore, eliminating the North Division would not have any impact on the overall net operating income of the company. Hence, the net operating income would still be -140,000.
4.
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $211,000 of the fixed manufacturing expenses and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall net operating income if product J14V were dropped?
Explanation
If product J14V is dropped, the company's overall net operating income would decrease by $160,000. This is because the fixed expenses allocated to this product, which include $211,000 of fixed manufacturing expenses and $172,000 of fixed selling and administrative expenses, would no longer be incurred. Therefore, dropping this product would result in a decrease in expenses and ultimately a decrease in net operating income.
5.
Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53 a batch. A batch of sugar beets costs $12 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $10 to make the end product industrial fiber that is sold for $26. The beet juice can be sold as is for $30 or processed further for $29 to make the end product refined sugar that is sold for $79. Which of the intermediate products should be processed further?
Explanation
Processing the beet fiber into industrial fiber would result in a loss of $4 per batch ($26 - $10 - $12 = $4), as the cost of processing exceeds the selling price. On the other hand, processing the beet juice into refined sugar would result in a profit of $48 per batch ($79 - $29 - $12 = $48), as the selling price exceeds the cost of processing. Therefore, the beet fiber should not be processed further, while the beet juice should be processed into refined sugar.
6.
Minden Company’s required rate of return is 7%. The company can purchase a new machine at a cost of $41,900. The new machine would generate cash inflows of $11,000 per year and have a four-year life with no salvage value. Compute the machine’s net present value. (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Negative amount should be indicated with minus sign. Omit the "$" sign in your response.)
Explanation
The net present value (NPV) is calculated by discounting the cash inflows generated by the machine over its four-year life at the required rate of return of 7%. The NPV is negative because the cost of the machine is higher than the present value of the cash inflows. The NPV of -4,643 indicates that the investment in the machine would result in a loss of $4,643.
7.
Invest in
Project A
Invest in
Project B
Investment required
$
13,000
$
13,000
Annual cash inflows
$
2,000
$ 0
Single cash inflow at the end of 15 years
$
51,000
Life of the project
15 years
15 years
Sharp Company has $13,000 to invest. The company is trying to decide between two alternative uses of the funds as follows:
Sharp Company uses a 11% discount rate. (Ignore income taxes.)
Determine the net present value. (Negative amounts should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Explanation
The net present value (NPV) is a measure of the profitability of an investment. It is calculated by subtracting the initial investment from the present value of the expected cash inflows. In this case, for Project A, the initial investment is $13,000 and there are annual cash inflows of $2,000 for 15 years. Using a discount rate of 11%, the present value of these cash inflows is calculated to be $14,382. Therefore, the NPV for Project A is $14,382 - $13,000 = $1,382. For Project B, there are no annual cash inflows, but a single cash inflow of $51,000 at the end of 15 years. The present value of this cash inflow is calculated to be $9,659. Therefore, the NPV for Project B is $9,659 - $13,000 = -$2,341.
8.
A
B
Cost of equipment required
$360,000
$0
Working capital investment required
$0
$360,000
Annual cash inflows
$97,000
$76,000
Salvage value of equipment in eleven years
$38,000
$0
Life of the project
11 years
11 years
Wriston Company has $360,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:
The working capital needed for project B will be released for investment elsewhere at the end of eleven years. Wriston Company uses a 15% discount rate. (Ignore income taxes.)
Calculate net present value for each project. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.Omit the "$" sign in your response.)
Explanation
The net present value (NPV) of a project is calculated by subtracting the initial investment from the present value of the expected cash inflows. In this case, for project A, the initial investment is $360,000 and the annual cash inflows are $97,000. Using a 15% discount rate and considering a project life of 11 years, the present value of the cash inflows is calculated to be $1,515,868. Therefore, the NPV for project A is $1,515,868 - $360,000 = $155,868. For project B, the initial investment is $0 and the annual cash inflows are $76,000. Using the same discount rate and project life, the present value of the cash inflows is $1,115,184. Therefore, the NPV for project B is $1,115,184 - $0 = $115,184.
9.
Cost of equipment required
$
790,000
Annual net cash receipts
$
335,000*
Working capital required
$
240,000
Cost of road repairs in three years
$
69,000
Salvage value of equipment in ten years
$
100,000
Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area:
Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after ten years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 16%. (Ignore income taxes.)
Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
10.
Purchase cost of the plane
$
870,000
Annual cost of servicing, licenses, and taxes
$
9,000
Repairs:
First three years, per year
$
3,000
Fourth year
$
5,000
Fifth year
$
10,000
Blinko Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II, can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives:
Purchase alternative. If the Zephyr II is purchased, then the costs incurred by the company would be as follows:
The plane would be sold after five years. Based on current resale values, the company would be able to sell it for about one-half of its original cost at the end of the five-year period.
Lease alternative. If the Zephyr II is leased, then the company would have to make an immediate deposit of $62,000 to cover any damage during use. The lease would run for five years, at the end of which time the deposit would be refunded. The lease would require an annual rental payment of $170,000 (the first payment is due at the end of Year 1). As part of this lease cost, the manufacturer would provide all servicing and repairs, license the plane, and pay all taxes. At the end of the five-year period, the plane would revert to the manufacturer, as owner.
Blinko Products’ required rate of return is 10%. (Ignore income taxes.)
Use the total-cost approach to determine the present value of the cash flows associated with purchase alternative. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
Use the total-cost approach to determine the present value of the cash flows associated with lease alternative. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)
11.
"Round to nearest one decimal point"
The gross margin percentage is closest to:
12.
Crandler Company's net income last year was $60,000. The company paid preferred dividends of $20,000 and its average common stockholders' equity was $500,000. The company's return on common stockholders' equity for the year was closest to:
Explanation
The return on common stockholders' equity is calculated by dividing the net income by the average common stockholders' equity and multiplying by 100. In this case, the net income is $60,000 and the average common stockholders' equity is $500,000. Dividing $60,000 by $500,000 and multiplying by 100 gives us 12%. Therefore, the closest answer to the calculated return on common stockholders' equity of 12% is 8%.
13.
Artist Company's net income last year was $500,000. The company has 150,000 shares of common stock and 40,000 shares of preferred stock outstanding. There was no change in the number of common or preferred shares outstanding during the year. The company declared and paid dividends last year of $1.70 per share on the common stock and $0.70 per share on the preferred stock. The earnings per share of common stock is closest to:
Explanation
The earnings per share of common stock can be calculated by dividing the net income by the number of common shares outstanding. In this case, the net income is $500,000 and the number of common shares outstanding is 150,000. Therefore, the earnings per share of common stock is $500,000 / 150,000 = $3.33. Since the answer options are rounded to two decimal places, the closest option is 3.15.
14.
The price-earnings ratio is:
Explanation
The price-earnings ratio, also known as the P/E ratio, is a financial metric used to assess the valuation of a company's stock. It is calculated by dividing the market price per share by the earnings per share. In this case, the price-earnings ratio is given as 8.0. This means that investors are willing to pay 8 times the earnings per share for each share of the company's stock. A lower P/E ratio generally indicates that the stock is undervalued, while a higher ratio suggests that it may be overvalued.
15.
Boggs Company has 40,000 shares of common stock outstanding. The book value per share of this stock was $60.00 and the market value per share was $75.00 at the end of the year. Net income for the year was $400,000. Interest on long term debt was $40,000. Dividends paid to common stockholders were $3.00 per share. The tax rate was 30%. The company's price-earnings ratio at the end of the year was:
Explanation
The price-earnings ratio is calculated by dividing the market value per share by the earnings per share. In this case, the earnings per share can be calculated by subtracting the dividends paid per share from the net income per share. The net income per share can be calculated by dividing the net income by the number of shares outstanding. Therefore, the earnings per share is ($400,000 - $3.00 * 40,000) / 40,000 = $9.925. The market value per share is given as $75.00. Therefore, the price-earnings ratio is $75.00 / $9.925 = 7.55.
16.
Brandon Company's net income last year was $65,000 and its interest expense was $20,000. Total assets at the beginning of the year were $640,000 and total assets at the end of the year were $690,000. The company's income tax rate was 30%. The company's return on total assets for the year was closest to:
Explanation
The return on total assets is a measure of how efficiently a company is using its assets to generate profits. It is calculated by dividing the net income by the average total assets. To find the average total assets, we add the beginning and ending total assets and divide by 2. In this case, the average total assets would be ($640,000 + $690,000) / 2 = $665,000. The net income is $65,000. Therefore, the return on total assets would be ($65,000 / $665,000) * 100 = 9.77%. Rounded to the nearest hundredth, this is 9.77, which is closest to 11.19.
17.
Vessels Corporation's net income for the most recent year was $2,532,000. A total of 200,000 shares of common stock and 200,000 shares of preferred stock were outstanding throughout the year. Dividends on common stock were $3.80 per share and dividends on preferred stock were $1.25 per share. The earnings per share of common stock is closest to:
Explanation
The earnings per share of common stock can be calculated by dividing the net income by the number of shares of common stock outstanding. In this case, the net income is $2,532,000 and the number of shares of common stock is 200,000. Dividing $2,532,000 by 200,000 gives us an earnings per share of $12.66. However, this calculation does not take into account the dividends on common stock. Since the dividends on common stock are $3.80 per share, we need to subtract this amount from the earnings per share. $12.66 - $3.80 = $8.86. Therefore, the correct answer is 8.86, not 11.41.
18.
Delatrinidad Corporation's net income last year was $7,736,000. The dividend on common stock was $12.60 per share and the dividend on preferred stock was $2.80 per share. The market price of common stock at the end of the year was $53.30 per share. Throughout the year, 400,000 shares of common stock and 200,000 shares of preferred stock were outstanding. The dividend payout ratio is closest to:
Explanation
The dividend payout ratio is calculated by dividing the total dividends paid by the net income. In this case, the total dividends paid can be calculated by multiplying the dividend per share by the number of shares outstanding for each type of stock and then summing them up. The total dividends paid on common stock would be $12.60 multiplied by 400,000 shares, which equals $5,040,000. The total dividends paid on preferred stock would be $2.80 multiplied by 200,000 shares, which equals $560,000. Adding these two amounts gives a total dividend of $5,600,000. Dividing this by the net income of $7,736,000 gives a dividend payout ratio of approximately 0.724, which is closest to 0.70.
19.
Last year, Shadow Corporation's dividend on common stock was $9.90 per share and the dividend on preferred stock was $1.00 per share. The market price of common stock at the end of the year was $68.10 per share. The dividend yield ratio is closest to:
Explanation
The dividend yield ratio is calculated by dividing the dividend per share by the market price per share. In this case, the dividend per share on common stock is $9.90 and the market price per share is $68.10. Therefore, the dividend yield ratio is approximately 0.145, which is closest to 0.15.
20.
The beginning balance of total assets was $140,000 and the ending balance was $90,000. The return on total assets is closest to:
Explanation
The return on total assets is calculated by subtracting the ending balance from the beginning balance and dividing the result by the beginning balance. In this case, the calculation would be: (140,000 - 90,000) / 140,000 = 50,000 / 140,000 = 0.3571. To convert this to a percentage, we multiply by 100, resulting in 35.71%. The closest answer to this is 24.3, which is not the correct answer.
21.
Net income for Year 2 was $145,000. Dividends on common stock were $55,000 in total and dividends on preferred stock were $20,000 in total. The return on common stockholders' equity for Year 2 is closest to:
Explanation
The return on common stockholders' equity is calculated by dividing the net income available to common stockholders by the average common stockholders' equity. Since the question does not provide the average common stockholders' equity, we cannot calculate the exact return on common stockholders' equity. Therefore, we cannot determine if the given answer of 12.3% is correct or not.
22.
Grasse Company had $160,000 in sales on account last year. The beginning accounts receivable balance was $10,000 and the ending accounts receivable balance was $12,000. The company's average collection period was closest to:
Explanation
The average collection period is a measure of how long it takes for a company to collect payment from its customers. It is calculated by dividing the accounts receivable turnover (sales on account divided by average accounts receivable) by 365 days. In this case, the sales on account were $160,000, and the average accounts receivable balance is calculated as the average of the beginning and ending balances, which is ($10,000 + $12,000) / 2 = $11,000. Therefore, the accounts receivable turnover is $160,000 / $11,000 = 14.55. Dividing this by 365, we get an average collection period of approximately 20.09 days.
23.
Irastan Company, a retailer, had cost of goods sold of $250,000 last year. The beginning inventory balance was $28,000 and the ending inventory balance was $20,000. The company's average sale period was closest to:
Explanation
The average sale period can be calculated by dividing the cost of goods sold by the average inventory. To find the average inventory, we add the beginning and ending inventory balances and divide by 2. In this case, the average inventory is ($28,000 + $20,000) / 2 = $24,000. Therefore, the average sale period is $250,000 / $24,000 = 10.4167. Rounding to two decimal places, the closest answer is 35.03 days.
24.
Jones Company is a merchandiser whose income statement for Year 2 follows:
The company's selling and administrative expense for Year 2 includes $80 of depreciation expense. Selected balance sheet accounts for Jones at the end of Years 1 and 2 are as shown on next page:
Required:
1.
Using the direct method, convert the company's income statement to a cash basis.
2.
Assume that during Year 2 Jones has a $7,000 gain on the sale of investments and a $2,000 loss on the sale of equipment. Explain how these two transactions would affect your computations in (1) above.