Question 1

Emily has been out of school and working as a physiotherapist for four years.She is in the process of buying a condo and is applying for a mortgage from the Canadian Bank.The bank has asked for a personal balance sheet for Emily before making its decision.She has come to you for help and has provided you with the following information:
i) Emily bought a car four years ago for $15,000.She borrowed the money from her parents, interest free, and still owes them $3,000 and makes monthly payments of $250.She estimates the car is worth about $5,000 now.
ii) Emily has $1,800 in her checking account and $12,000 in Canada Savings Bonds (CSBs), which she will use for the down payment on the condo.
iii) Emily owns some jewellery given to her after her grandmother past away.Although it is priceless to Emily the local jeweller says it is worth $3,500.
iv) Emily worked some overtime at another clinic over the recent holidays and is owed $2,500 for it.v) Emily has a music player and CD collection worth about $1,000.
vi) Emily has old furniture in her current apartment that she paid $500 for but is hoping to buy some new things to go with her new place.She hopes a charity will come and take all of the old stuff away.
vii) Emily has a $500 balance on her credit card but pays it off every month.Required:
A) Prepare a personal balance sheet for Emily.She wants you to explain why things were or were not included so that she could do it herself next time.
B) How will the Canadian Bank use the information to help it make a decision? 
C) What, if any, other information would the bank like to have?

Accepted Answer

The answer of Emily has been out of school and...

Question 2

Differentiate between an asset and an expense.Use the example of a table and chairs and explain how each could be either an asset or an expense.

Accepted Answer

The answer of Differentiate between an asset and an expense.Use...

Question 3

If a company bought inventory on account, what would be the effect on the company's current ratio and debt-to-equity ratio?
$\begin{array}{ll}
&\text { Current } & \text { Debt-to-Equity } \
&\text { Ratio } & \text { Ratio } \
A.&\text { increase } & \text { increase } \
B.&\text { increase } & \text { decrease } \
C.&\text { decrease } & \text { increase } \
D.&\text { decrease } & \text { decrease }
\end{array}$

Accepted Answer

Buying inventory on account increases both current assets (inventory) and current liabilities (accounts payable), which could decrease the current ratio if the ratio of current liabilities to current assets increases. It also increases total liabilities (through the increase in accounts payable), which increases the debt-to-equity ratio as more debt is taken on relative to equity.

Question 4

If an analyst wanted to compare the operating performance of two retail companies, which of the following would be most useful?

Accepted Answer

The gross margin percentage would be the most useful in comparing the operating performance of two retail companies as it measures the profitability of a company's products or services after deducting the cost of goods sold. This allows for a comparison of the efficiency of each company's cost management and pricing strategies. The current ratio and debt-to-equity ratio would be helpful in assessing a company's overall financial health, but would not provide specific insight into their operating performance. The operating cycle measures the time it takes for a company to convert its inventory into cash, which is important in assessing liquidity but again, does not provide specific information on operating performance.

Question 5

If a company used some cash to pay off some long-term liabilities, what would be the effect on the company's current ratio and debt-to-equity ratio?
 $\begin{array}{ll}
&\text { Current } & \text { Debt-to-Equity } \
&\text { Ratio } & \text { Ratio } \
A.&\text { increase } & \text { increase } \
B.&\text { increase } & \text { decrease } \
C.&\text { decrease } & \text { increase } \
D.&\text { decrease } & \text { decrease }
\end{array}$

Accepted Answer

The answer of If a company used some cash to...

Question 6

Why is the cash basis of accounting not used when preparing general purpose financial statements? What is used instead?

Accepted Answer

The answer of Why is the cash basis of accounting...

Question 7

If a company sold shares for cash, what would be the effect on the company's current ratio and debt-to-equity ratio? 
$\begin{array}{ll}
&\text { Current } & \text { Debt-to-Equity } \
&\text { Ratio } & \text { Ratio } \
A.&\text { increase } & \text { increase } \
B.&\text { increase } & \text { decrease } \
C.&\text { decrease } & \text { increase } \
D.&\text { decrease } & \text { decrease }
\end{array}$

Accepted Answer

Selling shares for cash increases the company's current assets (cash), improving the current ratio. It does not increase debt but increases equity, thereby decreasing the debt-to-equity ratio.

Question 8

The following is a list of accounts for Carleton Corporation for the year ended October 31, 2012. $$\begin{array} { l r } 
\text { Advertising expense } & \$ 130,000 \
\text { Amortization expense } & 90,000 \
\text { Cost of sales } & 545,000 \
\text { General and administrative expenses } & 158,000 \
\text { Income tax expense } & 105,000 \
\text { Interest expense } & 60,000 \
\text { Research expense } & 100,000 \
\text { Sales revenue } & 1,900,000 \
\text { Sales commissions } & 190,000 \
\text { Salaries expense } & 376,000
\end{array}$$ Required:
A) Prepare an income statement for Carleton for the year.
B) What is Carleton's gross margin for the year?
C) What is Carleton's gross margin percentage for the year?

Accepted Answer

The answer of The following is a list of accounts...

Question 9

For which of the following ratios would a decrease in the ratio normally imply an improvement in the company's performance?

Accepted Answer

A decrease in the debt-to-equity ratio would mean that the company has reduced its debt relative to its equity, which is generally seen as a positive sign as it reduces the company's financial risk and increases its ability to pay off its debts.

Question 10

If a company used some cash and a long-term loan to buy land and a building, what would be the effect on the company's current ratio and debt-to-equity ratio? 
$\begin{array}{ll}
&\text { Current } & \text { Debt-to-Equity } \
&\text { Ratio } & \text { Ratio } \
A.&\text { increase } & \text { increase } \
B.&\text { increase } & \text { decrease } \
C.&\text { decrease } & \text { increase } \
D.&\text { decrease } & \text { decrease }
\end{array}$

Accepted Answer

Using cash decreases current assets, which lowers the current ratio. Taking on a long-term loan increases total debt, raising the debt-to-equity ratio.

Question 11

Lennox Limited reported sales of $5,000,000, cost of goods sold of $3,200,000, operating expenses of $1,400,000, and income tax expense of $160,000 for the year.What is the gross profit percentage for the year?

Accepted Answer

Gross profit percentage is calculated as (Gross Profit / Sales) * 100. Gross Profit is Sales minus Cost of Goods Sold, which is $5,000,000 - $3,200,000 = $1,800,000. Therefore, the gross profit percentage is ($1,800,000 / $5,000,000) * 100 = 36%.

Question 12

Classify each of the following balance sheet items as a current asset, non-current asset, current liability, or non-current liability.
A) Dividends declared but not yet paid to shareholders
B) Wages owing to employees
C) A loan owing to a shareholder that will be repaid in two years
D) Land purchased for expansion by a retailer
E) An amount owing from a customer due in 15 months

Accepted Answer

The answer of Classify each of the following balance sheet...

Question 13

If a stakeholder wanted to measure the risk of a company, which of the following would they calculate?

Accepted Answer

The debt-to-equity ratio measures the amount of debt a company has in comparison to its equity, which indicates the risk level of the company. Higher debt-to-equity ratios suggest greater risk as the company may have more difficulty covering its debt obligations in the long term.

Question 14

Classify each of the following balance sheet items as a current asset, non-current asset, current liability or non-current liability.
A) cash
B) a 10-year loan owing to a bank
C) an amount owing to a supplier due in 30 days
D) land purchased for immediate resale by a real estate developer
E) a delivery truck

Accepted Answer

The answer of Classify each of the following balance sheet...

Question 15

If a company has a current ratio of 0.82, which of the following statements would be true?

Accepted Answer

A current ratio of 0.82 indicates that the company may have difficulty meeting its short-term obligations. A ratio below 1 indicates that the company may not have enough current assets to cover its current liabilities. Therefore, the company will have negative working capital, which is the difference between current assets and current liabilities.

Question 16

Tim has decided to run a lawn service business for the summer.He charges customers $100 per month to mow and maintain their lawns.In May he was able to get 10 contracts signed, for services starting
June 1st.On June 1st he collected $100 from each of seven customers and $300 from the other three, who will all be out of town for the summer so have paid for all three months at once.Tim bought a second-hand mower for the summer for $240, which he picked up in May but didn't pay for until June, when he had some cash
available.He estimates that it will be completely worn out by the end of the summer.He mowed and maintained the lawns for June and paid $50 for gas for his mower.
Required:
A) What is Tim's net income for June under the cash basis of accounting?
B) What is Tim's net income for June under the accrual basis of accounting?
C) What is Tim's expected net income for the summer under the cash basis of accounting?
D) What is Tim's expected net income for the summer under the accrual basis of accounting?
E) Which method is more appropriate for Tim? Support your answer.

Accepted Answer

The answer of Tim has decided to run a lawn...

Question 17

Below are partial income statements for Haliburton Ltd.for three years.  Required:
A) Fill in the missing amounts.
B) Is Haliburton's operating performance improving? Support your answer.

Accepted Answer

The answer of Below are partial income statements for Haliburton...

Question 18

A company has current assets of $200,000 and current liabilities of $150,000.If they used cash to pay off some accounts payable what would the effect be on their working capital?

Accepted Answer

Paying off accounts payable with cash decreases both current assets and current liabilities by the same amount, leaving working capital (current assets - current liabilities) unchanged.

Question 19

Prepare a proper balance sheet for Wawa Corporation from the following list of accounts on June 30,
2012: $$\begin{array} { l r l r } 
\text { Accounts payable } & 105,000 & \text { Land } & 175,000 \
\text { Accounts receivable } & 52,500 & \text { Long-term loan } & 150,000 \
\text { Advances received from } & & \text { Plant and equipment } & 375,000 \
\text { customers in advance } & 35,000 & \text { Rent paid in advance } & 15,000 \
\text { Capital Stock } & 250,000 & \text { Retained earnings } & 144,000 \
\text { Cash } & 15,000 & \text { Wages and salaries owing } & 18,500 \
\text { Current portion of long-term loan } & 50,000 & & \
\text { Inventory } & 120,000 & &
\end{array}$$

Accepted Answer

The answer of Prepare a proper balance sheet for Wawa...

Question 20

Wasago is in its first year of operation, and the bookkeeper has prepared the following summary of all of their accounts and balances as at August 31, 2012.Prepare a proper balance sheet for Wasago
Corporation. $\begin{array}{llll}
\text { Accounts payable } & 26,000 & \text { Investment by } \
\text { Accounts receivable } & 36,000 & \text { shareholders } & 25,000\
\text { Bank loan, short-term } & 12,000 & \text { Loans made to company } \
\text { Cash } & 2,000 & \text { by shareholders }\
\text { Income tax expense } & 7,500 & \text { Operating expenses } & 182,500 \
\text { Income taxes payable } & 7,500 & \text { Office equipment } & 45,000 \
\text { Insurance paid in advance } & 5,000 & \text { Sales revenues } & 212,500 \
\text { Inventory } & 30,000 & &
\end{array}$

Accepted Answer

The answer of Wasago is in its first year of...

Quiz 2: Financial Statements: a Window on an Entity