UMUC ACC301 Quiz 3

UMUC ACC301 Quiz 3 in $26 only

Question 1 (10 points):

Name two advantages and two disadvantages of using the corporation form of business.

Question 2 (10 points):

What is the difference between Common Stock and Preferred Stock? What are some of the advantages of owning Preferred Stock instead of Common Stock?

Question 3 (10 points)

Explain the difference between the declaration date, record date, and payment date in reference to dividends.

Question 4 (10 points)

On January 1, 20X5, Juan Silvia borrowed $500,000 to purchase a new office building. The loan is to be repaid in 2 equal annual payments, beginning December 31, 20X5. The annual interest rate on the loan is 9%.

Prepare the appropriate journal entries to record the loan and subsequent payments at the end of 20X5 and 20X6.

Use the following information to answer Question 5 – Question 8

Jacob Joseph has identified five different companies in which he is interested in investing, based upon their products and prospects. However, Jacob is concerned about a general economic downturn and desires to invest in companies with the lowest debt exposure. Following is a list of the data for the five potential investments. Jacob has compiled the data and has ranked the companies based upon total debt. He has requested your help in evaluating the risk profiles for each company.

To complete your evaluation, you need to know that each company faces an income tax rate that is equivalent to 30% of income before taxes (which also means that net income is 70% of income before taxes). In addition, assume that each company incurs an average interest cost that is 8% of total debt.

Total Assets Total Debt Net Income
A $ 10,000,000 $ 1,000,000 $ 200,000
B 20,000,000 3,000,000 1,000,000
C 6,000,000 4,000,000 250,000
D 15,000,000 6,000,000 1,600,000
E 30,000,000 22,000,000 4,000,000

Question 5 (10 points)

Calculate the debt to total asset ratio, and reorder the list from least risky to most risky, based upon that ratio.

Question 6 (10 points)

Calculate the debt to equity ratio, and reorder the list from least risky to most risky, based upon that ratio.

Question 7 (10 points)

Calculate the times interest earned ratio, and reorder the list from least risky to most risky, based upon that ratio.

Question 8 (10 points)

Do the ratios suggest that risk is a function of total debt, or other factors? Do all the ratios produce the same signals?

Question 9 (10 points)

What is the difference between the direct method and indirect method of completing the statement of cash flows? Which method is utilized by most companies?

Use the following information for Question 10 – Question 12

Stanley Corporation has no material problem with uncollectible accounts or obsolete inventory. All sales and purchases are on account. The company provided the following information for the year ending 20X7:

Total sales $ 2,600,000
Beginning accounts receivable 700,000
Total purchases of inventory 1,800,000
Beginning inventory 50,000
Collections on accounts receivable 2,400,000
Payments on accounts payable 1,850,000
Cost of goods sold 1,775,000

Question 10 (5 points)

Calculate the accounts receivable turnover ratio.

Question 11 (5 points)

Calculate the inventory turnover ratio.

Question 12 (10 points)

If Stanley’s competitors have a receivables turnover ratio of “6” and an inventory turnover ratio of “4,” would you initially conclude that Stanley is better or worse than its competitors in managing receivables and inventory? Why?

Question 13 (30 points)

For each of the activities below, indicate whether the activity is:

(a)Cash Flow from Operating Activity

(b)Cash Flow from Investing Activity

(c)Cash Flow from Financing Activity

(d)Non-Cash Investing/Financing Activity

Issue common stock for land

Issue common stock for cash

Pay interest on loan

Sell goods for cash

Pay employee salaries

Pay dividends to common shareholders

Receive dividend on an investment

Obtain proceeds of long-term loan

Acquire treasury shares

Purchase treasury shares

Purchase land for cash

Buy inventory for resale

Trade machinery for stock

Record depreciation expense

Pay dividend to holders of common stock

Question 14 (20 points)

Waguespack Corporation and Hedrick Corporation had identical cash positions at the beginning and end of 20X9. Each company also reported a net income of $150,000 for 20X9. Evaluate their cash flow statements that follow. Which company is displaying elements of cash flow stress? What factors cause you to reach this conclusion? What is the importance of evaluating a company’s cash flow statement?

Question 15 (15 points)

Ozark Corporation did not sell any equipment during the year. Equipment purchases were made with cash. The change in retained earnings is attributable to net income and dividends. The increase in common stock and additional paid-in capital is due to issuing additional shares for cash.

Using the indirect approach, prepare the INVESTING AND FINANCING sections of the statement of cash flows for Ozark for the year ending December 31, 20X5. Comparative balance sheets for Ozark follow.

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