Answer Chapter 2 Foudation of Management Accounting

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CHAPTER 2 - FOUNDATIONS OF MANAGEMENT ACCOUNTING

Exercise 1 Complete the following statements

1 RECEIVALBE TURNOVER

2 SOLVENCY

3 DEBT TO TOTAL ASSETS

4 HORIZONTAL

5 VERTICAL (common size)

6 LIQUIDITY, SOLVENCY, PROFITABILITY (ANY ORDER)

7 INCOME, INCOME TAXES, INTEREST EXPENSE8 CURRENT, ACID-TEST (QUICK)

9 NET CREDIT SALES, NET RECEIVABLES

10 P3,000,000 73 DAYS

11 6

12 PAYOUT

13 DEBT TO TOTAL ASSETS

Exercise 2

1 P PRICE EARNINGS RATIO

2 P RETURN ON ASSETS RATIO

3 L RECEIVABLES TURNOVER RATIO

4 P EARNINS PER SHARE RATIO5 P PAYOUT RATIO

6 L CURRENT CASH DEBT COVERAGE RATIO

7 L CURRENT RATIO

8 S DEBT TO TOTAL ASSETS RATIO

9 S FREE CASH FLOW

10 L INVENTORY TURNOVER RATIO

Exercise 31. Current ratio = P235,000 / P65,000 = 3.6 times

2. Return on common stockholders' equity = P75,000 / (P265,000 + P220,000) / 2 = 30.93

3. Price-earnings ratio =

EPS = P75,000 / 62,000 = P1.21 ; P/E Ratio = P15 / 1.21 = 12.4 times

4. Inventory turnover ratio = P184,000 / (P150,000 + P170,000) / 2 = 1.15 times

5. Receivables turnover = P360,000 / (40,000 + P30,000) / 2 = 10.3 times

6. Times interest earned = (P75,000 + P30,000 + P21,000) / P21,000 = 6 times

7. Profit margin ratio = P75,000 / P360,000 = 20.8%

8. Average days in inventory = 365 days / 1.15 = 317.4 days

9. Payout ratio = P50,000 / P75,000 = .67

10. Return on assets = P75,000 / (P405,000 + P500,000) / 2 = 16.6%11. Cash debt coverage ratio = P65,000 / (P140,000 + P280,000) / 2 = 31 times

Exercise 3a. Quick ratio = (P25,000 + P15,000) / current liabilities P50,000 = 0.80

b. Current ratio = (P25,000 + P15,000 + P60,000) / current liabilities P50,000 = 2.00.c. Debt ratio = total liabilities (P50,000 + P180,000) / total assets P400,000 = 57.5%.d. Debt-to-equity ratio = total liabilities (P50,000 + P180,000) / total equity (P40,000 + 130,000) = 135.3%.

Exercise 4Item 2010 2009 2008 2007

Net Sales 145% 128% 115% 100%Cost of Goods Sold 133% 120% 109% 100%Gross Profit 195% 160% 140% 100%

The trend in net sales is increasing and favorable. The cost of goods sold trend is increasing which could be unfavorable, but the salesare increasing each year at a faster pace than cost of goods sold. This is apparent by examining the gross profit percentages, which show afavorable, increasing trend.



Test I MULTIPLE CHOICE

1 B 6 D

2 A 7 C

3 B 8 B

4 A 9 D

5 C 10 A

B. STATEMENT OF CASH FLOWS

Exercise 1

a. Cash flows from operating activities Net income P369,000Depreciation expense 97,000Increase in accounts receivable (19,000)Increase in inventory (44,000)Increase in prepaid expense (6,000)Increase in accounts payable 27,000

Cash flows from operating activities P424,000

b. Cash flows used in investing activitiesPurchase of long-term assets P(612,000)Sale of long-term investments 39,000Cash flows used in investing activities P(573,000)

c. Cash flows from financing activitiesIssue of long-term debt P200,000

Issue of stock for cash 160,000Purchase of treasury stock (64,000) Cash flows from financing activities P296,000

d. Net change in cashIncrease from operating activities P424,000Decrease from investing activities (573,000)Increase from financing activities 296,000

Net increase in cash P147,000

Exercise 2JJJ COMPANY

Statement of Cash FlowsFor the Year Ended December 31, 2010

Cash flows from operating activitiesCash receipts from customers (P350,000 + P8,000) P358,000

Cash payments:To suppliers P298,000 (a)For operating expenses 24,000 (b)For interest expense 4,000For income taxes (P10,000 - P3,000) 7,000 333,000

Net cash provided by operating activities 25,000Cash flows from investing activities

Sale of equipment 12,000Cash flows from investing activities

Redemption of bonds payable (23,000)Issuance of common stock 17,000Payment of cash dividend (14,000)

Net cash used by financing activities (20,000) Net increase in cash 17,000Cash at beginning of period 25,000Cash at end of period $ 42,000

(a) Cost of goods sold P280,000Add: Increase in inventory 7,000Purchases 287,000Add: Decrease in accounts payable 11,000Cash payments to suppliers P298,000

(b) Operating expenses P36,000Less: Depreciation expense (12,000)*Cash payments for operating expenses P24,000*P24,000 - P16,000 = P8,000 balance in accumulated depreciation after sale.

Ending balance, P20,000 - P8,000 = P12,000 depreciation expense.



Exercise 3

(a) Cash receipts from customersSales + Decrease in Accounts ReceivableP2,000,000 + P15,000 = P2,015,000

(b) Cash payments to suppliersFirst calculate the amount of purchases:Beginning inventory P 205,000Add: Purchases ?

?Less: Ending Inventory 240,000

Cost of goods sold P1,700,000

Purchases = Cost of goods sold + increase in inventory= P1,700,000 + P35,000= P1,735,000

Amount of cash payments to suppliers:

Purchases + Decrease in accounts payable = P1,735,000 + P25,000 = P1,760,000

Exercise 4 Net income .............................................................................................................................................................................. P320,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense ................................................................................................................................................. 75,000Decrease in accounts receivable ................................................................................................................................ 15,000Decrease in inventories .............................................................................................................................................. 10,000Increase in prepaid expenses ..................................................................................................................................... (2,500)Decrease in accounts payable .................................................................................................................................... (4,000)Decrease in income taxes payable ............................................................................................................................. (600)

Net cash provided by operating act ivities ................................................................................................................. P412,900

Test I MULTIPLE CHOICE

1 A 16 A 31 A 46 B

2 A 17 C 32 C 47 C

3 B 18 A 33 B 48 C

4 A 19 D 34 B 49 C

5 A 20 A 35 C 50 C

6 B 21 A 36 D 51 D

7 A 22 C 37 B 52 D

8 A 23 B 38 C 53 C

9 B 24 D 39 A 54 B

10 A 25 C 40 B

11 C 26 B 41 A

12 A 27 A 42 C

13 A 28 C 43 B

C 29 B 44 C

14 D 30 B 45 A

15 A

*Solution to no 53

Net income .............................................................................................................................................................................. $150,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense ................................................................................................................................................. 65,000Decrease in accounts receivable ................................................................................................................................ 13,000Decrease in inventories .............................................................................................................................................. 15,000Decrease in accounts payable .................................................................................................................................... (6,000)

Net cash provided by operating act ivities ............................................................................................................................... P237,000

*Solution to no 54Cash flows from operating activities

Cash receipts from customers (P600,000 + P15,000) P615,000Cash payments:

For operating expenses (P60,000 + P4,000) P364,000For income taxes (P60,000 - P3,000) 57,000 421,000

Net cash provided by operating act ivities P194,000



Problem 1

Net income P230,000- Increase accounts receivable (4,000)+ Decrease in prepaid expenses 3,000- Decrease in accounts payable (1,000)

+ Depreciation 55,000+ Amortization 3,000

Cash flows from Operating Activities P286,000

Problem 2 1. Statement of Cash Flows

For the Year Ended December 31,Cash flows from operating activities

Net income ................................................................................................................................... P20,000Adjustments to reconcile net income to net cash provided by

operating activities:Depreciation expense ............................................................................................................. P 4,000

Loss on sale of long-term investment in bonds ...................................................................... 2,000Increase in accounts receivable .............................................................................................. (4,000)Decrease in prepaid expenses ................................................................................................ 2,000Increase in inventories ........................................................................................................... (10,000)Increase in accounts payable .................................................................................................. 18,000 12,000

Net cash provided by operating act ivities .............................................................................. 32,000Cash flows from investing activities

Sale of long-term investments ............................................................................................................. 16,000Purchase of equipment ........................................................................................................................ (30,000)

Net cash used by investing act ivities ..................................................................................... (14,000)Cash flows from financing activities

Issuance of common stock ................................................................................................................... 17,000Retirement of bonds payable ............................................................................................................... (8,000)Payment of cash dividends .................................................................................................................. (12,000)

Net cash used by financing activities ..................................................................................... (3,000)

Net increase in cash ................................................................................................................................... 15,000Cash at beginning of period .............................................................................................................................. 13,000Cash at end of period ................................................................................................................................... P28,000

Net cash provided by operating act ivities2. a. Current cash debt coverage ratio = ——————————————————

Average current liabilitiesP2,000

= ——————————— = 2.00 times(P7,000 + P25,000) ÷ 2

Net cash provided by operating activities b. Cash debt coverage ratio = ——————————————————

Average total liabilitiesP32,000= ——————————— = .56 times

(P52,000 + P62,000) ÷ 2

Problem 3 Statement of Cash Flows

For the Year Ended December 31, 2005Cash flows from operating activities

Net income ............................................................................................................................... P30,000Adjustments to reconcile net income to net cash provided byoperating activities

Depreciation ........................................................................................................................... P25,000Increase in accounts receivable .............................................................................................. (10,000)Increase in prepaid insurance ................................................................................................. (6,000)Increase in accounts payable .................................................................................................. 11,000Decrease in salaries payable .................................................................................................. (1,000) 19,000

Net cash provided by operating act ivities .............................................................................. 49,000Cash flows from investing activities

Collection of long-term loan ............................................................................................................... 35,000Proceeds from the sale of investments ................................................................................................ 27,000Purchase of equipment ........................................................................................................................ (10,000)

Net cash provided by investing activities .............................................................................. 52,000Cash flows from financing activities

Issuance of common stock ................................................................................................................... 20,000Redemption of bonds ........................................................................................................................... (24,000)Payment of dividends .......................................................................................................................... (9,000)

Net cash used by financing activities ..................................................................................... (13,000)Increase in Cash ............................................................................................................................... 88,000Cash at beginning of period .............................................................................................................................. 14,000Cash at end of period ............................................................................................................................... P102,000

Noncash investing and financing activitiesPurchase of land by issuing bonds ...................................................................................................... P40,000



Problem 4 Statement of Cash Flows

For the Year Ended December 31, 2005Cash flows from operating activities

Cash receipts from customers (1) P7,950,000Cash payments:

To suppliers (2) P5,405,000For operating expenses (3) 1,230,000 6,635,000

Net cash provided by operations P1,315,000(1) Sales P8,500,000

Deduct: Increase in accounts receivable 550,000Cash receipts from customers P7,950,000

(2) Cost of goods sold P5,300,000Add: Increase in inventory 230,000Purchases 5,530,000Deduct: Increase in accounts payable 125,000Cash payments to suppliers P5,405,000

(3) Operating expenses exclusive of depreciation and

amortization P1,210,000Add: Increase in prepaid expenses 200,000Deduct: Increase in accrued expenses payable (180,000)Cash payments for operating expenses P1,230,000

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Answer Chapter 2 Foudation of Management Accounting