Principles of Financial Accounting Final Exam

Java Python Principles of Financial Accounting

Final Exam

Part I: Shorter questions (24 points = about 15 minutes)

1. Cash proceeds from a stock issuance are reflected in the cash flows from financing activities. (3 points)

A)  True

B)  False

2. Sales returns and allowances is a contra-revenue account. (3 pts) /*NOT COVERED IN 2024*/

A)  True

B)  False

3. An understatement of ending inventory results in an overstatement of net income. (3 points)

A)  True

B)  False

4. Ordinary repairs and maintenance costs are incurred to maintain a long-lived productive asset and are expensed as incurred. (3 points)

A)  True

B)  False

5. The depreciation method chosen for financial reporting purposes (US GAAP) must also be utilized for income tax reporting (IRS). (3 points)

A)  True

B)  False

6. If sales revenue was $1,800,000 and accounts receivable decreased $40,000 during the year, then cash collected from customers equals $1,760,000 in that year. (3 points)

A)  True

B)  False

7. Chegg Unlimited began business on January 1, 2019. The company manufactures and sells commercial cleaning equipment. The  company provides a warranty on its units, whereby the company will replace any defective part for three years after the sale, at no additional cost to the customer. During 2019, the Company had sales of $800,000. The company estimates that the  cost  of the warranties will be 3% of sales. No warranty claims were made in 2019. During 2020, warranty claims of $13,250 are made. All warranty claims are satisfied and paid for in cash. What entry, if any, is necessary for 2020? (3 points)

A)  Dr Prepaid Warranty         24,000

Cr Warranty Accrual              24,000

B)  Dr Warranty Expense       24,000

Cr Warranty Accrual              24,000

C)  Dr Warranty Accrual         13,250

Cr Cash                                    13,250

D)  Dr Warranty Accrual        24,000

Warranty Expense                 24,000

E)  None of the above.

8. Continuing with the information provided in the previous question, suppose the ending balance on the warranty accrual as at end of 2020 was 52,000. What is the warranty expense recognized in the year 2020 for sales that occurred in 2020? (3 points)

A)  13,250

B)  41,250

C)  24,000

D)  65,250

E)  None of the above.

Part II: Longer questions (19 points = about 20 minutes)

9. Keeping all else equal, explain in one sentence each what effect this news has on the following (higher/lower/no effect) and why? (8 points)

10. Suppose that  Ford decided to move its headquarters to a new building and financed this purchase with a 7 year loan. Ford paid $2m upfront and agreed to pay $12.50m in each of the subsequent 7 years. The appropriate rate for such a project is 12%. Using PV tables, what would be the value of the building reported on the balance sheet? Show calculations. (5 points)

11.  These numbers were prepared for firms reporting under US GAAP. A different set of accounting rules has an impact on which items are recognized (“put”) on or off the balance sheet. Suppose you were to create a similar table for firms reporting under IFRS. Describe two cases in which  Principles of Financial Accounting Final Exam ;you expect adjustments to reported numbers to be more or less frequent and why. Be as specific as you can. For example, Total assets, less likely to be (upward) adjusted – some R&D costs can be capitalized under IFRS, so more intangibles assets will be on the balance sheet, so a rating agency is less likely to bring new assets as adjustments .  Provide two  more  distinct examples. (6 points)

Part III: Business application: Chevron (30 points = about 30 minutes)

Chevron Corporation is a large oil and gas company. Use the attached excerpts from its financial statements to answer questions in Part III.

12. What are the par values of Chevron’s preferred stock and common stock? (2 points)

13. Why did Chevron report no values of preferred stock reported? (2 points)

14. What is the number of common shares held by investors as of December 2019 (round up to the nearest million)? (2 points)

15. Focus on the Equity section of Chevron’s balance sheet. Which transaction(s) must have taken place in 2019 to explain the change in the additional paid in capital (“capital in excess of par value”)? Provide an explanation in up to THREE sentences, ruling out different alternatives. (5 points)

16. Suppose Chevron announces a 3:2 common stock split. What would be number of common shares authorized after the split? Provide the journal entry for this transaction. (3 points)

17. How much inventories did Chevron report at the end of 2019? (2 points)

18. What inventory balances would Chevron report in 2018 and 2019 had the firm reported using FIFO (‘replacement cost’)? (2 points)

19. Imagine you are in an interview or have just started your internship. Your boss wants you to assess this statement:

Chevron has a better/higher inventory turnover ratio than British Petroleum (BP). Chevron reported revenue of 146,500m and COGS of 84,200m in 2019.

You found additional info about BP: revenue of 282,600m and COGS of 233,000m in 2019. BP’s inventories at FIFO amounted to 20,880m (17,998m) in 2019 (2018). As a skilled user of financial statements, calculate inventory turnover ratios for BP, Chevron (as reported) and Chevron (FIFO); and evaluate the statement. (4 points)

20. What percentage of gross receivables did Chevron expect NOT to collect in December 2019? (2 points)

21. In percentage terms, how depreciated were Chevron’s fixed assets (PPE) in December 2019? (2 points)

22. Firms with the current ratio below  1 typically attract additional scrutiny. What current ratio would Chevron report in December 2019 had it not reclassified its short-term debt as long-term debt? (2 points)

23. Will Chevron be able to repay long-term debt (excluding lease liabilities) maturing in 2020 using cash balances available at the end of 2019? Why or why not? (2 points)

Part IV: Business application: Macy’s (9 points = about 10 minutes)

Macy’s is a fashion retailer headquartered in New York. It operates under three brands Macy's, Bloomingdale's and  Bluemercury.  Use  the  attached  excerpts from  its  financial statements to answer questions in Part IV.

24. What was the highest coupon rate that Macy’s paid on its long-term debt? (2 points)

Q25-29 were based on topics we did not cover in 2024

30.  Macy’s frequently retires its bonds to remain within debt covenant limits. What was the gain/loss on early debt retirement in fiscal year 2019? (2 points)

31.  What was Macy’s most recent debt-to-EBITDA ratio? Depreciation and amortization amounted to 1,000m.  [Hint:  Use both short-term and long-term debt and operating income is EBIT.] (2 points)

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