1

MGA 603 Practice Midterm Exam Professor GU

Student Name: 1. 2. 3. ". %. 6.

..

This exam consists of two questions. There are 7 pages (including this cover page). This is a close- oo! close-note exam. #ou are required to answer all questions ased on $our individual wor! onl$. &tate an$ additional assumptions $ou ma!e. SHO A!! "A!"U!A#$ONS.

'oints 'ro lem 1 'reparation of *ccounting +ntries and ,inancial &tatements 'ro lem 2 ,inancial (atio *nal$sis T0T*1 1.. points ". points -. points

(ecommended Time /. minutes

#our )rade

". minutes 12. minutes

Pro%&em ': Pre(aration of Accountin) Entries and *inancia& Statements +60 (oints, 2anc$ #amaguchi runs a small consulting-engineering firm that speciali3es in designing and overseeing the installation of environmental-control s$stems. 4owever5 even though she is the president5 she had no formal training in management. &he has een in usiness one $ear and has prepared the following income statement for her fiscal $ear ended 6une 3.5 2..78 ,ees collected in cash8 )eneral usiness (efiner$ usiness +xpenses paid in cash except for depreciation8 (ent 125%.. 9tilities 1.5... :ages 1%.5... 'resident;s salar$ "-5... 0ffice supplies 1"5... Travel ".5... <iscellaneous /.5... =epreciation 1.5... =ividends 3.5... 0perating >ncome -25%.. "1%5... ".5...

#amaguchi reali3ed that the entire ?%.5... cost of equipment acquired on 6ul$ 15 2../ should not e an expense of one $ear. &he predicted a useful life of five $ears5 a terminal (i.e.5 salvage) value of 3ero5 and deducted ?1.5... as depreciation for the first $ear. #amaguchi is thin!ing a out future needs for her expanding usiness. ,or example5 although she now uses rented space in an office uilding5 she is considering u$ing a small uilding. &he showed her income statement to a local an!er5 who reacted8 @2anc$5 this statement ma$ suffice for filing income tax forms5 ut the an! will not consider an$ long-term financing until it receives a alance sheet and income statement prepared on the accrual asis of accounting.A *s an <B* student5 $ou (C) are as!ed to fulfill the an!;s request. The following data have een gathered8 1. 0n 6ul$ 15 2../5 #amaguchi invested ?2%5... cash5 and two friends each invested ?25... cash in the firm in return for capital stoc!. 2. #amaguchi acquired ?%.5... of equipment on 6ul$ 15 2../. * down pa$ment of ?2.5... cash was made. * ?3.5... two-$ear note earing an annual interest rate of 1%D was signed. 'rincipal and interest are oth (a-a%&e onl$ at maturit$.

3. 0n 6une 3.5 2..75 clients owed #amaguchi ?7%5... on open accounts. :ith the exception of the oil refiner$ client (see elow E 7) all clients paid on credit. ". :ages and salaries are paid on the fifteenth of ever$ month. *s usiness expanded throughout the fiscal $ear5 additional emplo$ees were hired. The total pa$roll paid on 6une 1%5 2..75 including the president;s monthl$ salar$ of ?"5... was ?".5.... 2o new emplo$ees were hired during the last half of 6une 2..7. %. (ent was paid in advance on the fifteenth of ever$ month. *n initial pa$ment of ?15%.. covered 6ul$ 15 2../F*ugust 1%5 2../. 'a$ments of ?15... monthl$ were paid eginning *ugust 1%5 2../. -. 0ffice supplies on hand on 6une 3.5 2..7 were ?%5.... 7. 0n *pril 15 2..75 a local oil refiner$ gave #amaguchi a retainer fee of ?".5... cash in exchange for twelve months of consulting services eginning at that date. Required: 1. 9sing a lan! spreadsheet5 prepare Gournal entries for all transactions and adGusting entries for the compan$ during the fiscal $ear ended on 6une 3.5 2..75 including trial alance and closing entries. 'lease show $our computations5 where appropriate. (#ou ma$ use T-accounts instead of the spreadsheet5 if $ou prefer.) +./ (oints,

2. 9sing proper formatting and titles5 prepare the income statement5 the alance sheet5 and the statement of retained earnings for the fiscal $ear ended on 6une 3.5 2..7. +'/ (oints,

"

P&ease use t0is (a)e to (re(are -our financia& statements.

P&ease use t0is (a)e to (re(are -our financia& statements.

Pro%&em 1: *inancia& 2atio Ana&-sis +.0 (oints, Hincent Io.5 a large manufacturer of washer5 has two independent su sidiaries5 &tandard :asher and 1uxur$ :asher. The financial information of the two su sidiaries is given the following ta le. >gnore income taxes. 1ia ilities for &tandard :asher consist of onds pa$a le which incur interest at the rate of 1.D per $ear. 3ear ' ?%..< Standard as0er 3ear 1 3ear 3 ?%..< ?%..< ?2..< ?3..< ?7%.< ?3.< ?2..< ?3..< ?7%.< ?%< 3ear ' ?%..< ?. ?%..< ?%..< ?7%< !uxur- as0er 3ear 1 3ear 3 ?%..< ?%..< ?. ?%..< ?%..< ?%.< ?. ?%..< ?%..< ?2%<

+nd of #ear *ssets

+nd of #ear ?2..< 1ia ilities +nd of #ear ?3..< &hareholders; +quit$ &ales ?7%.< 2et >ncome (eturn on *ssets ?%%<

'rofit <argin (atio

*sset Turnover (atio

(eturn on +quit$

#o recei4e fu&& (oints -ou must SHO

3OU2 "OMPU#A#$ONS.

2e5uired: +a, Iompute the return on assets for the two su sidiaries for the past 3 $ears. >nsert $our com(utations and ans6ers in the previous ta le.

+%, >n all 3 $ears the profits from 1uxur$ :asher exceed those of &tandard :asher. Iomment on the relative profita ilit$ of the 2 su sidiaries using $our results from +a,. +c, Iompute the 'rofit <argin (atio and the *sset Turnover (atio for the two su sidiaries for the 3 $ears. >nsert $our com(utations and ans6ers in the previous ta le. +d, Based on $our results in +c, descri e the difference in the strategies of the two su sidiaries towards ma!ing a return on their assets.

+e, Iompute the return on equit$ for the two su sidiaries for the 3 $ears. >nsert $our com(utations and ans6ers in the previous ta le.

+f, >s an$ of the two su sidiaries successfull$ leveraged5 in #ear 15 #ear 25 and #ear 3J &upport $our answer with information from financial ratios.