The impact of management decisions and other topics

4-Financial statements for Larkins Company appear below:
Larkins Company
Statement of Financial Position December 31, Year 2 and Year 1 (dollars in thousands)

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Year 2

 

Year 1

4-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.

4.   Larkins Company’s dividend payout ratio for Year 2 was closest to:

A. 40.6%    B. 24.6%     C. 42.9%       D. 14.8%

 

 5.   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)


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. $70,000 increase. C. $55,000 decrease. D$90,000decrease.

 

6.   Fonics Corporation is considering the following three competing investment proposals:

 

Aye

Bee

Cee

Initial investment required

$62,000

$74,000

$95,000

Net present value

$10,000

$8,000

$12,000

Internal rate of return

15%

17%

18%


Using the project profitability index, how would the above investments be ranked (highest to lowest)?

A. Cee, Bee, Aye    B. Aye, Bee, Cee    C. Aye, Cee, Bee     D. Bee, Cee, Aye

7.   Which of the following would be classified as a financing activity on the statement of cash flows? 

 

 A. Dividends received on investments in another company’s common stock

B. Dividends paid to shareholders of the company on the company’s common stock

C. Interest received on investments in another company’s bonds

D. Interest paid on bonds issued by the reporting company

 

8.   (Ignore income taxes in this problem.) The following data pertain to an investment:

 

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%

 The net present value of the proposed investment is

   A. $621.      B. $0.     C. $3,355.        D. $(3,430).

 

9.   A project profitability index greater than zero for a project indicates that

 A. the discount rate is less than the internal rate of return.

B. the project is unattractive and shouldn’t be pursued.

C. the company should reevaluate its discount rate.

D. there has been a calculation error.

 

10.   Centerville Company’s debt-to-equity ratio is 0.60 Total assets are $320,000, current assets are $170,000, and working capital is $80,000. Centerville’s long-term liabilities must be

 A. $120,000.     B. $80,000.    C. $90,000.      D. $30,000.

 

 

11.   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:

 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

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?

 A. $59     B. $38     C. $180      D. $78

 

12-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.
12-
Larkins Company’s earnings per share of common stock for Year 2 was closest to:
A. $25.00.       B. $17.50.    C. $7.21.      D. $16.83.

 

13.   Brittman Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:

 

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


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?

A. $15.50 per minute   B. $13.50 per minute    C. $78.65 per unit     D. $39.15 per unit

14-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

The net cash provided by (used by) operations for the year was

A. $117.    B. $52.      C. $112.       D. $30.