Student ID: 21535917
Exam: 061684RR – THE IMPACT OF MANAGEMENT
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Questions 1 to 20: Select the best answer to each question. Note that a question and its answers may be split across a page
break, so be sure that you have seen the entire question and all the answers before choosing an answer.
1. Ignore income taxes in this problem.) Purvell Company has just acquired a new machine. Data on the
machine follow:
The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage
value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year.
The simple rate of return would be closest to
Purchase cost $50,000
Annual cost savings $15,000
Life of the machine 8 years
A. 18.75%.
B. 12.5%.
C. 17.5%.
D. 30.0%.
Use the following information to answer this question.
The most recent balance sheet and income statement of Teramoto Corporation appear below:
Comparative Balance Sheet
Ending
Balance
Beginning
Balance
Assets:
Cash and cash equivalents
Accounts receivable
Inventory
Plant and equipment
Less accumulated depreciation
Total assets
$43
53
73
582
301
$450
$35
59
69
490
286
$367
Liabilities and stockholders’ equity
Accounts payable
Wages payable
Taxes payable
Bonds payable
Deferred taxes
Common stock
Retained earnings
Total liabilities and stockholders’ equity
$57
21
15
21
20
55
261
$450
$48
18
13
20
21
50
197
$367
Income Statement
Sales
Cost of good sold
Gross margin
Selling and administrative expense
Net operating income
Income taxes
Net income
$893
587
306
189
117
35
$82
2. The net cash provided by (used by) operations for the year was
A. $117.
B. $112.
C. $30.
D. $52.
3. Cridwell Company’s selling and administrative expenses for last year totaled $210,000. During the year,
the company’s prepaid expense account balance increased by $18,000, and accrued liabilities increased by
$12,000. Depreciation charges for the year were $24,000. Based on this information, selling and
administrative expenses adjusted to a cash basis under the direct method on the statement of cash flows
would be
A. $192,000.
B. $240,000.
C. $180,000.
D. $228,000.
4. Products A, B, and C are produced from a single raw material input. The raw material costs $90,000,
from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period.
Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of
$12,500 and then sold for $5 per unit. Product A should be
A. sold at the split-off point, since further processing will result in a loss of $2,500 each period.
B. processed further, since this will increase profits by $12,500 each period.
C. processed further, since this will increase profits by $2,500 each period.
D. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
Use the following information to answer this question.
The most recent balance sheet and income statement of Teramoto Corporation appear below:
Comparative Balance Sheet
Ending
Balance
Beginning
Balance
Assets:
Cash and cash equivalents
Accounts receivable
Inventory
Plant and equipment
Less accumulated depreciation
$43
53
73
582
301
$35
59
69
490
286
Total assets $450 $367
Liabilities and stockholders’ equity
Accounts payable
Wages payable
Taxes payable
Bonds payable
Deferred taxes
Common stock
Retained earnings
Total liabilities and stockholders’ equity
$57
21
15
21
20
55
261
$450
$48
18
13
20
21
50
197
$367
Income Statement
Sales
Cost of good sold
Gross margin
Selling and administrative expense
Net operating income
Income taxes
Net income
$893
587
306
189
117
35
$82
5. The net cash provided by (used by) financing activities for the year was
A. ($18).
B. $5.
C. $1.
D. ($12).
6. Brittman Corporation makes three products that use the current constraint-a particular type of machine.
Data concerning those products appear below:
Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product.
Up to how much should the company be willing to pay to acquire more of the constrained resource?
IP NI YD
Selling price per unit $183.57 $207.74 $348.15
Variable cost per unit $144.42 $155.04 $269.50
Minutes on the constraint 2.90 3.40 5.50
A. $15.50 per minute
B. $39.15 per unit
C. $78.65 per unit
D. $13.50 per minute
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570
1,540
$180
180
120
50
530
1,480
Total assets $2,110 $2,010
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250
480
730
120
180
240
840
1,380
$2,110
$130
60
120
310
500
810
120
180
240
660
1,200
$2,010
Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income
$2,760
1,930
830
330
500
50
450
135
$315
7. Larkins Company’s dividend yield ratio on December 31, Year 2 was closest to:
A. 4.1%.
B. 2.1%.
C. 4.6%.
D. 5.0%.
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570
1,540
$180
180
120
50
530
1,480
Total assets $2,110 $2,010
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250
480
730
120
180
240
840
1,380
$2,110
$130
60
120
310
500
810
120
180
240
660
1,200
$2,010
Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income
$2,760
1,930
830
330
500
50
450
135
$315
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
8. Larkins Company’s earnings per share of common stock for Year 2 was closest to:
A. $16.83.
B. $25.00.
C. $17.50.
D. $7.21.
9. An increase in the market price of a company’s common stock will immediately affect its
A. debt-to-equity ratio.
B. dividend payout ratio.
C. dividend yield ratio.
D. earnings per share of common stock.
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570
1,540
$180
180
120
50
530
1,480
Total assets $2,110 $2,010
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
$100
60
90
250
480
730
120
180
240
840
1,380
$130
60
120
310
500
810
120
180
240
660
1,200
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
Total liabilities & stockholders’ equity $2,110 $2,010
Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income
$2,760
1,930
830
330
500
50
450
135
$315
10. Larkins Company’s book value per share at the end of Year 2 was closest to:
A. $10.00.
B. $23.33.
C. $70.00.
D. $76.67.
11. The net present value method assumes that the project’s cash flows are reinvested at the
A. discount rate used in the net present value calculation.
B. internal rate of return.
C. simple rate of return.
D. payback rate of return.
12. VIM Company purchased $100,000 in inventory from its suppliers on credit terms. The company’s
acid-test ratio would most likely
A. decrease.
B. be impossible to determine without more information.
C. increase.
D. be unchanged.
13. A company’s current ratio and acid-test ratios are both greater than 1. If obsolete inventory is written
off, this would
A. increase net working capital.
B. increase the acid-test ratio.
C. decrease the acid-test ratio.
D. decrease the current ratio.
Use the following information to answer this question.
Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position
December 31, Year 2 and Year 1
(dollars in thousands)
Dividends during Year 2 totaled $135 thousand, of which $12 thousand were preferred dividends. The
market price of a share of common stock on December 31, Year 2 was $150.
Year 2 Year 1
Current assets:
Cash and marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Noncurrent assets:
Plant & equipment, net
$180
210
130
50
570
1,540
$180
180
120
50
530
1,480
Total assets $2,110 $2,010
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Noncurrent liabilities:
Bonds payable
Total liabilities
Stockholders’ equity:
Preferred stock, $20 par, 10%
Common stock, $10 par
Additional paid-in capital–common stock
Retained earnings
Total stockholders’ equity
Total liabilities & stockholders’ equity
$100
60
90
250
480
730
120
180
240
840
1,380
$2,110
$130
60
120
310
500
810
120
180
240
660
1,200
$2,010
Larkins Company
Income Statement
For the Year Ended December 31, Year 2
(dollars in thousands)
Sales (all on account)
Cost of goods sold
Gross margin
Selling and administrative expense
Net operating income
Interest expense
Net income before taxes
Income taxes (30%)
Net income
$2,760
1,930
830
330
500
50
450
135
$315
14. Larkins Company’s return on total assets for Year 2 was closest to:
A. 13.6%.
B. 17.0%.
C. 15.3%.
D. 16.0%.
15. Degner Inc. has some material that originally cost $19,500. The material has a scrap value of $13,300
as is, but if reworked at a cost of $2,100, it could be sold for $14,000. 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?
A. -$1,400
B. -$20,900
C. -$7,600
D. $11,900
16. Which of the following would be considered a “use” of cash for the purpose of constructing a statement
of cash flows?
A. Amortizing a patent
B. Issuing long-term debt
C. Selling the company’s own common stock to investors
D. Purchasing equipment
17. Kava Inc. manufactures industrial components. One of its products, which is used in the construction
of industrial air conditioners, is known as K65. Data concerning this product are given below:
The above per unit data are based on annual production of 4,000 units of the component. Direct labor can
be considered to be a variable cost. (Source: CMA, adapted)
The company has received a special, one-time-only order for 500 units of component K65. There would
be no variable selling expense on this special order, and the total fixed manufacturing overhead and fixed
selling and administrative expenses of the company wouldn’t be affected by the order. Assuming that Kava
has excess capacity and can fill the order without cutting back on the production of any product, what is
the minimum price per unit on the special order below which the company shouldn’t go?
Per Unit
Selling price $180
Direct materials $29
Direct labor $5
Variable manufacturing overhead $4
Fixed manufacturing overhead $21
Variable selling expense $2
Fixed selling and administrative expense $17
A. $78
B. $180
C. $38
D. $59
Use the following information to answer this question.
The most recent balance sheet and income statement of Teramoto Corporation appear below:
Comparative Balance Sheet
Ending
Balance
Beginning
Balance
Assets:
Cash and cash equivalents
Accounts receivable
Inventory
Plant and equipment
Less accumulated depreciation
Total assets
$43
53
73
582
301
$450
$35
59
69
490
286
$367
Liabilities and stockholders’ equity
Accounts payable
Wages payable
Taxes payable
Bonds payable
Deferred taxes
Common stock
Retained earnings
Total liabilities and stockholders’ equity
$57
21
15
21
20
55
261
$450
$48
18
13
20
21
50
197
$367
Income Statement
Sales
Cost of good sold
Gross margin
Selling and administrative expense
Net operating income
Income taxes
Net income
$893
587
306
189
117
35
$82
18. The net cash provided by (used by) investing activities for the year was
A. ($77).
B. $77.
C. $92.
D. ($92).
19. The Clemson Company reported the following results last year for the manufacture and sale of one of
its products known as a Tam.
Sales (6,500 Tams at $130 each) $845,000
Variable cost of sales 390,000
Variable distribution costs 65,000
Fixed advertising expense 275,000
Salary of product line manager 25,000
Fixed manufacturing overhead 145,000
Net operating loss $(55,000)
End of exam
Clemson Company is trying to determine whether to discontinue the manufacture and sale of Tams. The
operating results reported above for last year are expected to continue in the foreseeable future if the
product isn’t dropped. The fixed manufacturing overhead represents the costs of production facilities and
equipment that the Tam product shares with other products produced by Clemson. If the Tam product
were dropped, there would be no change in the fixed manufacturing costs of the company.
Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other
product lines. If the company discontinues the Tam product line, the change in annual operating income (or
loss) should be a
A. $65,000 decrease.
B. $90,000 decrease.
C. $70,000 increase.
D. $55,000 decrease.
20. (Ignore income taxes in this problem.) The following data pertain to an investment:
The net present value of the proposed investment is
Cost of the investment $18,955
Life of the project 5 years
Annual cost savings $5,000
Estimated salvage value $1,000
Discount rate 10%
A. $0.
B. $3,355.
C. $621.
D. $(3,430).
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