Module 3 Sample Exam - Annotated Solutions

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Warning: do not assume your actual Module 3 Exam for ACCTG 211 will be exactly like what you see below. The sample exam below is based on information that we feel is important to reinforce via practice problems. Refer to your notes from class and all other sources for this semester to determine the complete set of topics that will be covered on the exam. So what is the value of this sample exam? It is simply offered as a means to help you study the basic concepts we have addressed in class and provide a look at how the concepts might be applied on a sample exam. Refer all questions to members of the instructional team (instructors and/or TAs). ACCTG 211 SAMPLE EXAM #3 Rev: 08/18/21 (Originally Rev: 04/30/20 ) The last page of this document is a list of the exact Ratios and Formulas that will be provided on the Exam. 1. Cracker Company Balance Sheet December 31, 2013 Assets Liabilities Current Assets: Current Liabilities: Cash $ 100 Accounts Payable $ 500 Accounts Receivable $ 500 Wages Payable $ 150 Inventory $1,000 Warranty Payable $ 150 Total Current Assets $1,600 Total Current Liabilities $ 800 Operating Assets $1,000 Longterm Liabilities $ 300 Total Liabilities $1100 Other Assets $ 400 Stockholders' Equity: Total Assets $3,000 Common Stock 1,000 shares issued and outstanding Additional Paid In Capital Common Stock $ 900 Total SE $1,900 Liabilities and Total SE $3,000 The Book Value per share of common stock would be: a. $3.00 b. $1.90 c. $1.60 d. $1.10 Book Value per Share of Common Stock = Common Stockholders’ Equity / Number of Common Shares Outstanding Remember: Common Stockholders’ Equity = Stockholders’ Equity – Preferred Stock Since there is no Preferred Stock, Common Stockholders’ Equity would be the same as Total Shareholders’ Equity Book Value per Share = $1,900 Common Stockholders’ Equity / 1,000 Shares of Common Stock Outstanding

The following information pertaining to Shorty's Shirt Factory for the year 2013 is to be used for Questions 2-5. Net Sales (all on credit) $250,000 Cost of goods sold 110,000 Gross margin 140,000 Operating expenses 96,000 Interest expense 14,000 Income taxes expense 12,000 Net income 18,000 01/01/13 12/31/13 Cash $ 10,000 $ 12,000 Accounts receivable 7,400 10,600 Inventory 11,300 12,700 Long-Term operating assets (net of accum. depreciation) 70,300 85,700 Total assets 99,000 121,000 Accounts payable 5,000 17,000 Income taxes payable 3,000 5,000 Notes payable (long-term) 28,000 28,000 Common stock ($10 par) 50,000 50,000 Retained earnings 13,000 21,000 2. Shorty's gross margin ratio for 2013 is: a. 6.11% b. 7.78% c. 17.60% d. 56.00% e. 60.00% Gross Margin = (Net Sales – COGS) / Net Sales  ($250,000 – 110,000) / $250,000 = 0.56 (56%) 3. Shorty's return on equity ratio for 2013 is: a. 65.67% b. 44.78% c. 39.40% d. 35.22% e. 26.87% Return on Equity = (Net Income) / Average Stockholders’ Equity  $18,000 / [($63,000 + $71,000) / 2] = .02687 4. Shorty's current ratio at 12/31/13 is: a. 1.60 b. 2.08 c. .62 d. 1.03 e. .58 Current Ratio = Current Assets / Current Liabilities  ($12,000 + $10,600 + $12,700) / ($17,000 + $5,000) = 1.6 *Remember: Current Assets = Cash or other Assets that are expected to be converted into cash within a year and Current Liabilities are obligation that are expected to be met/satisfied (paid) within one year.

5. Shorty's earnings per share ratio for 2013 is: a. $ 0.36 b. $ 3.6 c. $ 5.0 d. $ 8.8 e. $ 0.60 Earnings per Share = (Net Income – Preferred Dividends) / Average Number of Common Shares Outstanding ($18,000 – $0) / 5,000 Shares of Common Stock = 3.6 *There is NO Preferred Stock Outstanding, so there can’t be any Preferred Dividends and Common Shares Outstanding does not change throughout the year (Remember: the balance in the Common Stock Account = Shares Outstanding / Par Value of Common Stock) 6. Spilled, Inc. wants to increase its earnings per share. Which of the following actions will cause an increase? a. reduce the amount of dividends on common stock. b. sell more shares of common stock. c. sell more shares of preferred stock. d. acquire shares of common stock and hold them as treasury shares. e. increase interest expense. *Earnings per Share = (Net Income – Preferred Dividends) / Average Number of Common Shares Outstanding Therefore, we are looking for anything that would change Net Income, Preferred Dividends, or CS Outstanding a). Dividends paid to Common Shareholders ARE NOT on the Income Statement, so they DO NOT affect Net Income b). Selling more Shares of Common Stock would INCREASE Average Common Shares Outstanding; therefore, it would DECREASE Earnings per Share (by increasing the denominator of the equation, EPS would decrease ) c). Selling shares of Preferred Stock WOULD NOT change Average Number of Common Shares outstanding d). When a company repurchases shares of Common Stock (as Treasury Shares), the number of Common Shares Issued would not change, but the Number of Common Shares Outstanding WOULD decrease. This would DECREASE Average Number of Common Shares Outstanding; therefore, it would INCREASE Earnings per Share (by decreasing the denominator of the equation, EPS would increase) d). Increasing Interest Expense would DECREASE Net Income which would DECREASE Earnings per Share 7. Which of the following transactions will cause the current ratio to increase? a. The cash payment of a long-term debt b. The sale of common stock for cash c. Purchase of a factory building for exchange of common stock not previously issued d. Borrowing money from a bank which is to be repaid in 10 years e. Both (b) and (d) are correct *Current Ratio = Current Assets / Current Liabilities Therefore, we are looking for anything that would Increase Current Assets with respect to Current Liabilities This can be done in a Number of ways: 1). Increase in Current Assets, No change in Current Liabilities 2). No Change in Current Assets, Decrease in Current Liabilities 3). Both Current Assets & Current Liabilities Decrease, but Current Liabilities Decrease MORE THAN Current Assets Decrease 3). Both Current Assets & Current Liabilities Increase, but Current Assets Increase MORE THAN Current Assets Decrease a). Cash Payment of a Long-Term Debt would DECREASE Cash (a Current Asset) and have NO EFFECT on Current Liabilities (Long-Term Debt is not considered to be “Current”), which as a result would DECREASE the current Ratio b). The sale of Common Stock for Cash would INCREASE Cash (a Current Asset), and have NO EFFECT on Current Liabilities, which as a result would INCREASE the Current Ratio c). The Purchase of a factory building for an exchange of common stock not previously issued would have NO EFFECT on Current Assets OR Current Liabilities d). Borrowing Money from a bank that is to be repaid in 10 years would INCREASE Cash (a Current Asset), and have NO EFFECT on Current Liabilities (it would end up INCREASING Long-Term Liabilities)

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Use the following information to answer Questions 8 and 9: Income Statement 9For Year Ended 12/31/13 Net sales $750,000 Cost of goods sold 400,000 Cash operating expenses 200,000 Depreciation and amortization expense 50,000 Gain on sale of equipment 30,000 Net income $130,000 ADDITIONAL INFORMATION: 1. Increase in accounts receivable during 2013 $ 20,000 2. Decrease in inventory during 2013 15,000 3. Increase in accounts payable during 2013 22,000 8. What amount of cash was collected from customers during 2013? a. $730,000 b. $760,000 c $770,000 d. $780,000 When a company makes a sale, they recognize revenue in the amount of the sale, but they do not necessarily collect the cash from the sale (they would either book cash or accounts receivable). In the event cash is not collected in the full amount, the outstanding balance would increase Accounts Receivable until the balance is paid off. When calculating cash collections from customers, we must take a look at the amount of money that was owed to the company from customers at the beginning of the year (Beginning Accounts Receivable Balance) and compare to the amount of money owed to the company from the customers at the end of the year (Ending Accounts Receivable Balance). Here, there are three scenarios: 1). Accounts Receivable Balance doesn’t change  Cash Collections from Customers would equal Net Sales during the period since you are owed no more nor any less money at the end of the year than you were owed at the beginning of the year 2). If a company’s Accounts Receivable balance increases  you would be owed more money at the end of the year than customers owed you at the beginning of the year, which would suggest that you were not able to collect the same amount of cash as you made in sales during the year 3). If a company’s Accounts Receivable balance decreases  you would be owed less money at the end of the year than customers owed you at the beginning of the year, which would suggest that you were able to collect more cash owed/outstanding from customers than sales made during the year For example, if the Beginning AR in the problem above was $78,000 and the Ending AR was $98,000 (Consistent with the Increase in AR of $20,000) This idea can be represented by the following Roll Forward: Beginning Accounts Receivable . . . . . . . . . . . $ 78,000 + Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 750,000 – Cash Collected from Customers . . . . . . . . . $ _____ = Ending Accounts Receivable . . . . . . . . . . . . $ 98,000 9. What amount of cash was paid to suppliers during 2013? a. $437,000 b. $407,000 c. $393,000 d. $363,000 This Roll Forward shows us that Cash Collected from Customers must be $20,000 less than Net Sales during the period in order to increase the Accounts Receivable Balance by $20,000.

In order to find the Cash Paid to Suppliers, you must first find how much inventory was purchased from the suppliers during the period. Since COGS represents the reduction of inventory as a result of sales throughout the period, Inventory purchases from the supplier can be determined by looking at the change in the Inventory account from the beginning of the period to the end. The question tells us the Inventory Balance Decreased during the year by $15,000. We can see the effect of this in the roll forward by making up numbers to plug into the equation that represent the decrease in Inventory over the course of the year: Beginning Inventory (as of 1/1/13) . . . . . . . . . $60,000 + Purchases of Inventory . . . . . . . . . . . . . . . .+ $ _____ – Cost of Goods Sold . . . . . . . . . . . . . . . . . . . – $400,000 = Ending Inventory (as of 12/31/13) . . . . . . . = $45,000 Once Inventory purchases from the supplier is determined, we can find cash paid to suppliers by comparing Inventory purchases over the year with the change in the Accounts Payable from the beginning of the year to the end of the year to the balance at the end of the year: • An increase in Accounts Payable = Company owes more money to its suppliers at the end of this year than they did at the beginning of the year o i.e. they did not pay for all inventory purchased from suppliers with cash o THEREFORE, you would SUBTRACT an increase in AP from purchases  This represents the amount of Inventory that was purchased this year on account (using Accounts Payable instead of cash) that is still outstanding as an Account Payable at the end of the year  i.e. They still owe the money! • A decrease in Accounts Payable = Company owes less money to its suppliers at the end of this year than they did at the beginning of the year o i.e. they paid outstanding Accounts Payable balances from previous periods o THEREFORE, you would ADD a decrease in AP from Inventory Purchases form Suppliers  At the beginning of the year, the company still owed suppliers from previous purchases. In this situation, the company would have paid cash to suppliers in an amount greater than purchases of Inventory in the current year in order to reduce its total liability/amount owed to the supplier • Just like we did above for the Beginning and Ending Inventory Balances, we can see the effect of the $22,000 Increase in Accounts Payable over the year by making up numbers to plug in, ensuring that the numbers reflect an increase of $22,000 from the Beginning of the year to the End of the Year. This can be represented by the following roll forward: Beginning Accounts Payable (as of 1/1/13) . . . . . . . . . . . $ 48,000 + Purchases of Inventory . . . . . . . . . . . . . . . . . . . . . . . + $ 385,000 – Cash Payments to Suppliers. . . . . . . . . . . . . . . . . . . . . – $ = Ending Accounts Payable (as of 12/31/13) . . . . . . . . = $70,000 This can also be represented using the following linear formula: Beginning AP + Purchases of Inventory – Ending AP = Cash Paid to Suppliers for Inventory The $60,000 plug for Beginning Inventory and the $45,000 plug for ending Inventory demonstrate the decrease in inventory over time and the effect COGS has on ending Inventory The $48,000 plug for Beginning AP and the $70,000 plug for Ending AP demonstrate the increase in AP the year and the implications that has on Cash Payments to Suppliers for Inv.

10. The cash flow statement a. Provides explanation as to why cash in bank has declined during a period in which a firm has earned positive net income. b. Provides information on the capital expenditures of a firm (expenditures for the replacement of long-term operating assets of a firm). c. Provides information on the ability of a firm to repay its long-term debt. d. All of the above are true statements. The Statement of Cash Flows has three sections. 1. Cash from/for Operating Activities 2. Cash from/for Investing Activities 3. Cash from/for Financing Activities The Statement of Cash Flows provides detailed information about a company’s cash position by shining a light on cash- based transactions throughout the period. The statement of cash flows is based true cash inflows and outflows (cash actually coming into and leaving the company’s bank accounts) throughout any given period and does not at all follow accrual accounting rules (the statement of cash flows strictly used the cash method of accounting). The statement of cashflows for example can explain why a company’s cash balance decreased over a period of time in which Net Income was positive by shining a light on the cash activities (i.e. sources and uses of cash) during that period of time for Operating Activities, Investing Activities, and Financing Activities. Additionally, detailed information regarding the acquisition/disposition of long-term assets as well as any Capital Improvements is provided in the Investing Activities section of the Statement of cashflows Cash Flows. CASH FLOW STATEMENT CLASSIFICATION For each transaction listed below, indicate how the transaction would be reported on a Cash Flow Statement prepared using the direct method. Use the following notations: A = Not Reported on the Cash Flow Statement in any of the 3 categories listed below B = Operating Activities C = Investing Activities D = Financing Activities Rules of Thumb for Cash Flow Statement Classification:  Cash from/for Operating Activities o Items/Activities found on a company’s Income Statement  Cash from/for Investing Activities o Activities associated with a company’s PP&E  I.e. Purchase, Sale, or Capital Improvements  Cash from/for Financing Activities o Activities associated with raising capital/financing a company’s operations 11. __C___ Cash payment for the purchase of a warehouse (long-term operating asset) Long-Term Investments in PP&E are Investing Activities 12. __B___ Cash payment for the payment of employee wages This would be on the Income Statement as Wages Expense, so it would be classified as an Operating Activity 13. __B___ Cash payment of interest on a long-term note The cash payment of Interest on a Long-Term note would be an Operating Activity because it would show up on the Income Statement as Interest Expense. Interest Payments associated with Financing Obligations are ALWAYS considered to be Operating Activities, as only the cash Inflow when borrowing the long term note and the payment of principal would be considered a Financing Activity associated with the long-term note

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14. __A___ Depreciation expense Though on the Income Statement, Depreciation is considered to be a NON-CASH item/activity since there are no cash inflows or outflows associated with this item on the Income Statement. 15. __A___ Acquired a long-term operating asset by exchanging shares of common stock Since there are no Cash Flows associated with this event, it would NOT be reported on the Statement of Cash Flows. 16. __D___ Cash payment of a dividend Cash payments of dividends are considered to be Cash Flows for Financing Activities given that they are associated with Outstanding Common Stock (In other words, a Financing Activity). 17. __B___ Cash paid for the purchase of raw materials The purchase of raw materials is a normal operating activity and shows up on the Income Statement as COGS when company sells the inventory that includes the cost of raw materials. 18. __D___ Cash paid to retire long-term debt (principal only) The retirement of long-term debt is another way to say they repaid the principal of their loan, therefore it is associated with the financing of a company. 19. __D___ Cash received from the issuance of common stock The issuance of common stock is a source of capital for a company and associated with financing long-term investments and general operations, therefore, it is considered a Financing Activity 20. __B___ Cash received from the sale of inventory This would show up on the Income Statement as Sales Revenue, therefore it would be an Operating Activity 21 . Determine the effect of the following scenario on each of the following ratios: • Cash Flows to Assets • Current Ratio • Profit Margin Ratio Remember, the equations for the Ratios above will be given to you on the exam and are at the end of this practice exam. For your convenience, the Equations for the ratios in question are: Cash Flows to Assets Ratio = Net Cash Flows from Operating Activities Average Total Assets Current Ratio = Current Assets Current Liabilities Profit Margin = Net Income Net Sales Deal ONLY with the facts provided in the scenario, and determine the direct effects of the scenario ONLY in the current period. Assume no effect on the market price of stock. Assume the Current Ratio prior to any scenario was 2:1. When determining the effect of the given scenario on each of the ratios, you should decide what journal entries would be required and whether or not the accounts involved would have any effect of the numerator or denominator of the equations of the ratios in question.

John Doe Corporation declared and paid cash dividends to its Common Shareholders in the current period. It has no Preferred Shareholders. a. The Cash Flows to Assets Ratio will decrease, the Current Ratio will decrease, no effect on the Profit Margin Ratio b. The Cash Flows to Assets Ratio will increase, the Current Ratio will decrease, no effect on the Profit Margin Ratio c. The Cash Flows to Assets Ratio will decrease, the Current Ratio will increase, the Profit Margin Ratio will decrease d. The Cash Flows to Assets Ratio will increase, the Current Ratio will increase, the Profit Margin Ratio will decrease e. No effect on the Cash Flows to Assets Ratio, the Current ratio will decrease, the Profit Margin Ratio will increase Dividends paid to Common Shareholders in the current period would be a Cash Flow for Financing Activities and would NOT be included on the Income Statement. The journal entry for this transaction would be: Debit Dividend Expense Account (Decrease Shareholders’ Equity) Credit Cash Account (Decrease Total Assets) Therefore, the Effect on the following ratios would be: Cash Flows to Assets Ratio  Net Cash Flows from Operating Activities would not be affected (cash dividends paid would be considered a Financing Activity), and Average Total Assets would decrease as a result of the dividends being paid (a decrease in the cash balance). THEREFORE, the current ratio would INCREASE . Current Ratio  Current Assets would decrease as a result of the cash dividend being paid, and there would be no effect on Current Liabilities (since the dividend was declared AND paid in the same period, current liabilities would increase and then decrease when paid in the same period). THEREFORE, the current ratio would DECREASE . Profit Margin  Cash dividends paid would have no effect on Net Income OR Net sales, THEREFORE, there would be NO EFFECT to profit margin. 22. Determine the effect of the following scenario on each of the following ratios: • Return on Equity Ratio • Debt to Equity Ratio • Return on Assets Ratio Remember, the equations for the Ratios above will be given to you on the exam and are at the end of this practice exam. For your convenience, the Equations for the ratios in question are: Return on Equity Ratio = Net Income Average Stockholders’ Equity Debt to Equity Ratio = Total Liabilities Total Stockholders’ Equity Return on Assets = Net Income Average Total Assets Deal ONLY with the facts provided in the scenario, and determine the direct effects of the scenario ONLY in the current period. Assume no effect on the market price of stock. Assume the Current Ratio prior to any scenario was 2:1. As stated above, when determining the effect of the given scenario on each of the ratios, you should decide what journal entries would be required and whether or not the accounts involved would have any effect of the numerator or denominator of the equations of the ratios in question.

David’s Furniture purchased inventory on account. This inventory was not sold in the current period. a. The Return on Equity Ratio will increase, The Debt to Equity Ratio will decrease, the Return on Assets Ratio will increase b. The Return on Equity Ratio will decrease, The Debt to Equity Ratio will increase, and the Return on Assets Ratio will decrease c. The Return on Equity Ratio will increase, The Debt to Equity Ratio will increase, and no effect on the Return on Assets Ratio. d. No effect on the Return on Equity Ratio, the Debt to Equity Ratio will decrease, and the Return on Assets ratio will increase e. No effect on the Return on Equity Ratio, the Debt to Equity Ratio will increase, and the Return on Assets Ratio will decrease Purchases of Inventory on Account would increase both assets and liabilities because the company would acquire Inventory, which would increase the company’s Inventory Account (since the Inventory was not sold during the current period), and as a result, the company would have an outstanding Account Payable to their supplier. The journal entry for this transaction would be: Debit Inventory Account (Increase Total Assets) Credit Accounts Payable Account (Increasing Total Liabilities) Therefore, the Effect on the following ratios would be: Return on Equity  Purchases of Inventory on Account would have no effect on Net Income OR Average Shareholders’ Equity, THEREFORE, there would be NO EFFECT to Return on Equity. Debt to Equity Ratio  Total Liabilities would increase as a result of Inventory being purchased on account , and Average Shareholders’ Equity would not be effected, THEREFORE, the Debt to Equity Ratio would INCREASE . Return on Assets  Purchases of Inventory on Account would have no effect on Net Income, but would INCREASE Total Assets as a result of Inventory being purchased on account (that is NOT sold). THEREFORE, the Return on Assets would DECREASE . 23. Determine the effect of the following scenario on each of the following ratios: • Current Ratio • Debt to Equity Ratio • Gross Margin Ratio Remember, the equations for the Ratios above will be given to you on the exam and are at the end of this practice exam. For your convenience, the Equations for the ratios in question are: Current Ratio = Current Assets Current Liabilities Debt to Equity Ratio = Total Liabilities Total Stockholders’ Equity Gross Margin Ratio = Gross Margin Net Sales Deal ONLY with the facts provided in the scenario, and determine the direct effects of the scenario ONLY in the current period. Assume no effect on the market price of stock. Assume the Current Ratio prior to any scenario was 2:1. As stated above, when determining the effect of the given scenario on each of the ratios, you should decide what journal entries would be required and whether or not the accounts involved would have any effect of the numerator or denominator of the equations of the ratios in question.

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Derrick Co. paid a current liability with cash a. No effect on the Current Ratio, the Debt to Equity Ratio will decrease, and no effect on the Gross Margin Ratio b. No effect on the Current Ratio, the Debt to Equity Ratio will increase, and the Gross Margin Ratio will decrease c. The Current Ratio will increase, the Debt to Equity Ratio will decrease, and no effect on the Gross Margin Ratio d. The Current Ratio will increase, the Debt to Equity Ratio will decrease, and no effect on the Gross Margin Ratio e. The Current Ratio will decrease, the Debt to Equity ratio will increase, and the Gross Margin Ratio will increase Current Liabilities paid with cash decrease both assets and liabilities because the company would retire their short-term liabilities by paying them off with cash. The journal entry for this transaction would be: Debit Current Liability Account (Decrease (current) Liabilities) Credit Cash Account (Decrease (current) Assets) Therefore, the Effect on the following ratios would be: Current Ratio  To determine the provided scenario’s effect on the current ratio, it is important to remember that the Current Ratio prior to any scenario was 2:1, as stated above. The easiest way to determine the effect of the provided scenario on the Current Ratio is by making up numbers to plug into the numerator and denominator of the current ratio equation (that represent the 2:1 ratio specified) and decrease them by the same amount to determine the new current ratio. Assuming the current liability paid with cash was for $10, Beginning Current Assets was $100, and Beginning Current Liabilities was $50, the effect on the Current Ratio would be as follows: $100  $90 $50 $40 As shown above, the Current Ratio would INCREASE as a result of the provided scenario. Debt to Equity Ratio  The payment of a current liability would result in Total Liabilities decreasing and would have no effect on Total Shareholders’ Equity. THEREFORE, the company’s Debt to Equity Ratio would INCREASE as a result of the provided scenario. Gross Margin Ratio  The payment of a current liability would have NO EFFECT on the company’s Gross Margin Ratio since neither Gross Margin (Sales Revenue – COGS) nor Net Sales would change. 24. Determine the effect of the following scenario on each of the following ratios: • Current Ratio • Inventory Turnover • Earnings Per Share Remember, the equations for the Ratios above will be given to you on the exam and are at the end of this practice exam. For your convenience, the Equations for the ratios in question are: Current Ratio = Current Assets Current Liabilities Inventory Turnover Ratio = Cost of Goods Sold Average Inventory Earnings Per Share = (Net Income – Preferred Dividends) Avg # of Common Shares Outstanding Current Ratio: 2:1 9:4  AKA 2.25:1

Deal ONLY with the facts provided in the scenario, and determine the direct effects of the scenario ONLY in the current period. Assume no effect on the market price of stock. Assume the Current Ratio prior to any scenario was 2:1. Cookies and Cream Inc. sold merchandise costing $30,000 for $50,000 cash a. The Current Ratio will increase, Inventory Turnover will increase, Earnings Per Share will increase b. The Current Ratio will increase, Inventory Turnover will decrease, Earnings Per Share will increase c. The Current Ratio will increase, no effect on Inventory Turnover, Earnings Per Share will decrease d. The Current Ratio will decrease, Inventory Turnover will increase, Earnings Per Share will increase e. The Current Ratio will decrease, Inventory Turnover will decrease, Earnings Per Share will decrease Sales of merchandise require 2 Journal Entry bookings  The revenues generated from the sale of merchandise (booking the cash receipt and the revenue generated from the sale) and the Inventory leaving the company’s possession in the form of an Expense (or cost) of the transaction (reducing the amount of inventory on hand and booking the cost associated with the sale of merchandise). The journal entry for this transaction would be: Debit Cash Account (Increase Assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,000 Credit Sales Revenue Account (Increase Shareholders’ Equity) . . . . $50,000 Debit COGS Account (Decrease Shareholders’ Equity) . . . . . . . . . . . . . . . . $30,000 Credit Inventory Account (Decrease Assets) . . . . . . . . . . . . . . . . . . . $30,000 Therefore, the Effect on the following ratios would be: Current Ratio  As shown by the journal entries above, the provided scenario would increase Current Assets by $20,000 (Increase in the company’s Cash Account of $50,000 and a Decrease in their Inventory Account of $30,000). Current Liabilities on the other hand would not be affected by the provided scenario. THEREFORE, the company’s Current Ratio would INCREASE as a result. Inventory Turnover Ratio  The sale of merchandise would Increase COGS for the period, while at the same time, decrease Average Inventory which would INCREASE the Inventory Turnover Ratio. Earnings Per Share  The provided scenario would increase net income by $20,000 [ the transaction generates $50,000 in Sales Revenue and $30,000 in COGS (an expense account representing the cost of the Inventory sold to the company) ] . Since the change in the number of common shares outstanding was noted, Earnings Per Share (EPS) would INCREASE as a result of the provided scenario.

Important Note: this Module 3 sample exam is intentionally light on the Lesson 7 (Statement of Cash Flows) material. This, because we feel that your BEST form of practice for exam questions coming from Lesson 7 will be to work and understand the following: 1) Northwest Statement of Cash Flows problem (linked in the Lesson 7 “Read-Watch-Do-Review” page, within the “Do” section). 2) In class example problems . 3) McGraw-Hill Connect practice problems, including reworking your Lesson 7 homework, working through your Lesson 7 extra credit assignment, and working through the Lesson 7 non-graded assignments . So please make sure that you spend the appropriate amount of time working and understanding the items listed immediately above. Please see the instructional team (TAs and/or instructors) with questions about these items.

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Ratios and Formulas Provided on Exam 3 (these are the exact ratios that will be provided on Exam 3) All ratios and formulas we discuss are important. However, to keep the information related to ratio analysis at an introductory level, we will only ask you to be prepared to deal with these ratios and formulas that are provided on the exam, and only in the format provided below (which may vary slightly from the textbook). Current Ratio = Debt to Equity Ratio = Inventory Turnover Ratio = Return on Assets Ratio = Gross Margin Ratio = Profit Margin Ratio = Return on Equity Ratio = Earnings per Share Ratio = Price Earnings Ratio = Dividend Yield Ratio = Cash Flow Yield Ratio = Cash Flows to Sales Ratio = Cash Flows to Assets Ratio = Free Cash Flows = Working Capital = Book Value per Share =

Module 3 Sample Exam - Annotated Solutions

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